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CHINA'S  LOAN  NEGOTIATIONS 

ADDRESS 

Delivered  by 

MR.  WILLARD  STRAIGHT 

at  Clark  University 

Worcester,  Mass.,  November  14th,  1912 


NEW  YORK 
1912 


CHINA'S  LOAN  NEGOTIATIONS. 


It  is  the  purpose  of  this  paper  to  explain,  if  possible,  three 
things:  1st,  the  significance  of  Chinese  loans;  2nd,  the  im- 
portance of  securing  and  retaining  an  American  interest 
therein,  and  3rd,  the  peculiar  difficulties  encountered  in  the 
recent  loan  negotiations. 

Dr.  Arthur  H.  Smith,  in  that  able  and  interesting  work 
"  Chinese  Characteristics,"  pointed  out  that  those  who,  under- 
standing the  vernacular,  walk  in  China's  streets  will  hear  the 
passersby  talk  of  little  save  money.  As  it  has  been  with  the 
daily  life  of  the  people  so  it  is  today  with  the  political  life  of 
the  nation.  The  question  of  money  is  all  important.  For  the 
last  ten  years,  and  especially  in  the  past  twelve  months  which 
witnessed  China's  wonderful  transformation  from  the  oldest 
emph-e  to  the  youngest  republic  in  the  world,  there  has  been  an 
mcessant  discussion  of  Chinese  loans. 

China's  Loan  history  may  be  divided  into  four  periods— 
The  first,  immediately  after  the  Chino-Japan  War— when 
funds  were  secured  from  abroad  to  pay  the  indemnity  exacted 
by  Japan  at  its  conclusion. 

The  second,  following  the  so  called  "  leasing  years  "  when  the 
great  powers  encouraged  their  bankers  to  finance  railway  con- 
struction in  the  regions  which  they  had  marked  out  as  their 
spheres  of  special  interest,  and  when  besides  acting  as  the 
politico-financial  agents  of  their  Governments,  these  bankers 
secured  for  the  industry  of  their  respective  countries  the  orders 
for  the  materials  required. 

The  third,  following  the  Russo-Japanese  War,  when  likin 
was  pledged  as  security  for  loans  and  when  a  combination  to 
which  the  American  Group  was  later  admitted  was  formed  by 


514303 


British,  German  and  French  financiers  for  undertaking  Chinese 
loans,  and  for  sharing  the  orders  for  materials  required  for 
their  construction. 

The  fourth,  and  present  period,  in  which  a  combination  has 
been  effected  between  the  four  Groups  named  above  and 
Russian  and  Japanese  interests,  for  jointly  financing  the  re- 
organization of  the  Chinese  Government. 

American  bankers  were  first  interested  in  Chinese  finance 
in  the  second  period,  in  the  Hankow-Canton  Railroad;  for 
business,  not  for  politics.  Their  rights  were  sold  back  to  China 
who  financed  the  repurchase  by  a  loan  obtained  from  the 
Government  of  Hongkong,  which  thus  for  obvious  political, 
because  geographical,  reasons,  secured  for  British  interests 
a  preferential  right  to  finance  the  construction  of  this  road  in 
case  foreign  capital  should  later  be  required. 

During  the  third  period  the  American  Group  was  organized 
and  became  associated  with  the  British,  German  and  French 
banking  groups.  The  American  Group,  moreover,  greatly 
contributed  to  the  successful  formation  of  the  combination 
which  marks  the  fourth  period,  a  combination  which  is  the 
financial  expression  of  John  Hay's  "  Open  Door  "  policy,  and 
which  makes  of  international  finance  a  guarantee  for  the  pres- 
ervation, rather  than  an  instrument  for  the  destruction,  of 
China's  integrity. 

Before  discussing  the  most  recent  phase  of  China's  loan 
negotiations,  however,  and  the  manner  in  which  the  American 
Group  at  the  instance  of  the  Department  of  State  made  its 
entry  into  this  field,  it  is  necessary  briefly  to  review  the  history 
of  the  past  few  years,  and  to  consider  the  factors  in  the  creation 
of  what  has  been  called  "  Dollar  Diplomacy." 

Because  of  this  so  called  "  Dollar  Diplomacy,"  President 
Taft,  and  his  Secretary  of  State,  Mr.  Knox,  have  been  subjected 
to  no  small  measure  of  criticism.  The  Administration  one 
hears  has  formed  an  unholy  alliance  with  the  Octopus;  and 
Wall  Street,  the  property  scape-goat  of  our  national  political 
drama,  is  accused  of  seducing  a  reluctant  and  hitherto  well- 


domesticated  Government  into  the  maelstrom  of  international 
financial  adventure. 

As  if  this  were  not  sufficient,  sober  and  intelligent  journals 
have  demanded  why  American  capital  should  seek  foreign  fields 
when  there  is  so  much  work  to  be  done  at  home.  Others  ad- 
mitting the  desirability  of  foreign  investment  and  the  possible 
necessity  of  diplomatic  support  for  those  who  undertake  it, 
have  objected  to  the  Administration's  assisting  certain  institu- 
tions in  Wall  Street  instead  of  American  bankers  in  general. 
It  must  be  remembered,  however,  that  the  success  of  any 
association  of  American  capitalists  undertaking  this  business  de- 
pends primarily  on  their  being  of  such  standing  as  to  command 
respect  from  financial  Groups  abroad  and  upon  their  willing- 
ness and  ability  to  bear  the  expense  of  representation  through 
tedious  and  too  often  unremunerative  negotiations.  Without 
these  qualifications  American  Bankers  are  not  equipped  to 
become  the  instruments  which  our  Government  requires  to 
assist  in  the  extension  of  our  foreign  trade. 

Another  section  of  the  press  hails  each  and  every  over- 
sea venture  with  indiscriminate  enthusiasm  and  rhetorically 
preens  the  feathers  of  the  Bird  of  Freedom,  sneering  at  or  con- 
demning our  rivals,  and  lauding  American  enterprise  with 
an  impartial  disregard  of  the  real  facts. 

There  has  been  too  much  unjust  criticism,  too  much  un- 
warranted praise,  and  too  general  a  lack  of  candid  exposition 
and  intelligent  comprehension  of  the  reasons  for,  and  possi- 
bilities of,  "  Dollar  Diplomacy." 

"  Dollar  Diplomacy "  is  a  logical  manifestation  of  our 
national  growth,  and  of  the  rightful  assumption  by  the  United 
States  of  a  more  important  place  at  the  council  table  of  nations. 
Our  export  trade  is  constantly  increasing  and  foreign  markets 
are  becoming  each  year  more  and  more  necessary  to  our 
manufacturers.  The  new  policy  aims  not  only  to  protect  those 
Americans  already  engaged  in  foreign  trade  but  to  promote 
fresh  endeavor  and  by  diplomatic  action  pave  the  way  for 
those  who  have  not  yet  been,  but  who  will  later  be,  obliged 
to  sell  either  capital  or  goods  abroad. 


European  diplomacy  is  engaged  in  solving  a  maze  of  com- 
plicated questions  immediately  political,  ultimately  commer- 
cial in  character.  France,  Germany,  Russia,  Italy,  Austria 
and  Japan  are  endeavoring  to  acquire  fresh  fields  for 
colonization  or  to  create  preferential  markets  for  their  mer- 
chants. Great  Britain  with  her  world-wide  possessions  is 
involved  directly  or  indirectly,  in  almost  every  international 
question  that  arises  and  with  these  powers  too,  diplomacy  has 
for  years  been  of  the  "  Dollar  "  variety. 

International  rivalry  of  this  character,  however,  is  found 
only  in  those  countries  whose  native  administrations  are 
either  decrepit  or  which  are  still  militarily  too  weak  to 
secure  that  consideration,  which,  unfortunately,  depends  not 
upon  international  equity,  but  upon  the  power  of  self-protec- 
tion. In  such  lands  a  Government  desiring  to  secure  a  market 
for  its  nationals  must  because  of  the  pressure  of  its  competi- 
tors either  acquire  territory  or  insist  on  an  equality  of  commer- 
cial opportunity.  It  must  either  stake  out  its  own  claim,  or, 
induce  other  interested  Powers,  to  preserve  the  "  open  door." 
There  is  no  middle  course.  This  is  a  statement  not  of  benevo- 
lent theories,  but  of  political  facts. 

The  people  of  the  United  States  do  not  desire  fresh  territory 
over  seas.  The  policy  of  our  Government  has  been  to  secure  for 
American  merchants  the  "  open  door."  American  industry  has 
until  recently  been  too  much  engaged  by  our  own  domestic 
expansion  seriously  to  set  about  the  establishment  of  foreign 
markets.  A  far-seeing  administration  has  therefore  inaugurated 
a  new  policy,  the  alliance  of  diplomacy,  with  industry,  commerce 
and  finance. 

This  is  "  Dollar  Diplomacy."  It  has  been  active  in  various 
ways.  In  South  America  it  has  aided  our  merchants  and 
manufacturers.  In  Central  America,  politics  have  played  a 
more  important  part,  and  the  Department  of  State  has  at- 
tempted to  bring  about  financial  reform  in  these  smaller 
republics,  and  to  prevent  the  recurrence  of  the  revolutions 
whose  leaders  have  almost  without  exception  been  actuated 


solely  by  a  desire  to  acquire  control  of  the  national  revenues. 
In  China  certain  very  tangible  results  have  been  accomplished 
and  it  is  to  give  a  more  accurate  conception  of  this  much 
discussed,  but  little  understood  subject,  that  this  paper  is 
written. 

Prior  to  1894,  China  had  practically  no  foreign  debt.  In 
1894-1896,  however,  she  borrowed  extensively  from  England, 
France  and  Germany,  to  finance  the  war  with  Japan  and  to 
provide  the  indemnity  which  she  was  forced  to  pay  at  its  con- 
clusion. These  loans  were  secured  upon  the  collections  of  the 
Imperial  Maritime  Customs,  a  Chinese  service  under  the 
control  of  that  able  Irishman,  Sir  Robert  Hart.  In  1898, 
however,  China  made  a  number  of  contracts  for  loans  for  rail- 
way construction,  with  British,  German,  French,  Belgian  and 
American  syndicates.  Under  all  these  agreements  the  bankers 
were  entitled  to  a  certain  share  in  the  profits  of  the  lines,  which 
were  themselves  to  be  mortgaged  as  security  for  the  loans, 
and  provision  was  made  in  almost  every  case  for  joint  foreign 
and  Chinese  management.  The  railway  materials  and  rolling 
stock  required  were  purchased  from  the  manufacturers  of  the 
countries  whose  bankers  undertook  to  issue  these  loans. 

The  cession  of  Formosa  to  Japan  at  the  termination  of  the 
Chino-Japanese  war,  the  occupation  of  Chinese  territory  by 
Russia,  Germany,  France  and  England,  in  1897-8  and  the 
exchange  of  "  diplomatic  notes "  between  these  Powers  re- 
garding the  protection  of  their  respective  interests  in  China, 
together  with  the  signature  of  the  railway  agreements  men- 
tioned gave  rise  to  a  discussion  throughout  the  European  and 
American  Press  of  the  imminent  breakup  of  China  and  the 
partition  of  this  ancient  empire  into  "  spheres  of  influence." 

In  China  the  broad  significance  of  these  events  was  prob- 
ably appreciated  by  but  few,  even  of  the  leading  statesmen 
of  the  time,  but  these  men,  nevertheless,  and  the  gentry  and 
official  classes  throughout  the  provinces  felt  that  their  country 
was  becoming  dominated  by  the  foreigner.  Seaports  had 
been  wrested  from  them,  and,   not  content  with   this,  the 


strangers  were  binding  their  helpless  motherland  with  rails  of 
steel. 

For  some  years  prior  to  1898,  the  Empress  Dowager  had 
been  in  comparative  retirement.  The  attempt  of  the  young 
Emperor,  Kuang  Hsti,  however,  under  the  advice  of  Kang 
Yu  Wei,  suddenly  to  introduce  widespread  reform,  brought  this 
redoubtable  lady  to  the  front  once  more.  Popular  discontent, 
fomented  by  bigoted  and  ignorant  officials  was  winked  at  if 
not  encouraged  by  a  Court  which  feared  that  the  extension 
of  Western  influence  might  bring  about  administrative  changes 
which  would  curtail  their  opportunities  for  illicit  gain.  The 
Boxer  Outbreak  was  the  result,  and  in  1900  the  reactionaries 
made  one  last  attempt  to  sweep  the  foreigner  into  the  sea. 
Peking  was  occupied  by  the  allied  troops,  the  Manchu  Court 
fled  to  Sianfu,  and  China  was  saddled  with  a  fresh  debt  of 
about  £60,000,000.  to  pay  for  her  mid-summer  madness.  This 
was  charged  upon  the  Maritime  Customs,  upon  certain  likin 
collectorates  and  upon  the  salt  gabelle. 

In  1898-1899  the  American  Secretary  of  State,  John  Hay, 
anxious  to  prevent  the  partition  of  China  and  to  protect  the 
interests  of  general  foreign  trade  against  discrimination  in  the 
portions  of  Chinese  territory  already  occupied  by  foreign 
powers,  enunciated  his  "  Open  Door  "  policy.  His  proposition, 
favorably  received  at  first  and  reaffirmed  in  the  negotiations 
which  followed  the  relief  of  Peking,  won  the  adherence  of  other 
nations  not  because  of  any  particular  consideration  for  China 
but  because  of  their  mutual  jealousy  and  their  realization  that 
partition  would  impose  upon  them  responsibilities  which  they 
might  find  it  difficult  to  bear. 

They  did  not  therefore  surrender  the  ports  which  they  had 
forcibly  leased,  but  their  acceptance  of  the  "  Open  Door  " 
doctrine  nevertheless  marked  the  beginning  of  a  financial  and 
commercial,  rather  than  territorial,  definition  of  their  respective 
interests.  The  Russo-Chinese  Bank  had  been  created  in  1895 
as  the  chief  instrument  of  Russia's  ambition  in  her  Manchu- 
rian  adventure.  This  institution  and  the  Hongkong  &  Shanghai 


Bank,  the  Deutsch-Asiatische  Bank,  the  Banque  de  I'lndo- 
Chine  and  the  Yokohama  Specie  Bank,  now  became  more  and 
more  generally  recognized  as  indispensable  financial  means  to 
the  political  and  commercial  ends  of  their  respective 
Governments. 

In  contrast  to  the  peaceful  rivalry  in  China  proper,  the 
situation  in  Manchuria  became  more  and  more  threatening. 
Russia  despite  her  diplomatic  assurances  to  the  contrary  did 
not  evacuate  this  region  occupied  after  the  Boxer  trouble. 
She  persisted  moreover  in  an  attempt  to  acquire  control  over 
northern  Korea  as  well,  until  Japan,  avowedly  the  champion 
of  China's  integrity  and  the  "  Open  Door  "  for  the  trade  of 
all  nations,  declared  war. 

Relieved  by  the  defeat  of  Russia  Peking  breathed  more  easily. 
This  satisfaction,  however,  was  short  lived,  for  the  Chinese 
soon  became  convinced  that  Japan  not  unnaturally  intended  to 
reap  for  herself  and  not  assure  to  China,  the  fruits  of  her  splendid 
victory.  She  had  taken  from  Russia  the  Liaotung  Peninsula, 
from  which  she  had  herself  been  ousted  after  the  China-Japan 
War.  More  than  that,  she  succeeded  to  Russia's  rights  in  the  rail- 
way running  north  from  Port  Arthur  and  in  the  coal  mines  at 
Fushun. 

When  His  Excellency  Yuan  Shih  Kai,  now  President  of  the 
Chinese  Republic,  went  to  Tientsin  as  Viceroy  of  Chihli 
Province,  he  had  with  him  a  number  of  officials,  notably  Tang 
Shao  Yi  and  Liang  Tun  Yen,  who  had  been  recalled  from 
America  in  the  early  80's,  but  who  had  not  after  their  return  to 
China  been  given  much  share  in  the  direction  of  affairs.  Yaun 
soon  found  himself  at  the  head  of  what  might  be  called  a 
"  Reform  "  party,  and  these  subordinates  of  his,  able,  accom- 
plished and  well  versed  in  American  and  European  methods 
greatly  aided  him  in  instilling  new  force  and  intelligence  into 
the  Peking  Government.  Administrative  reforms  were  de- 
manded, the  Chinese  Press,  hitherto  practically  non-existent, 
began  to  assert  itself,  and  young  men  educated  abroad  returned 
to  direct  a  "  rights  recovery  "  agitation  which  soon  developed 


8 

anti-Manchu  propaganda  and  which  found  its  final  expression 
in  the  revolution  of  last  year. 

Peking  became  concerned  about  Japan's  activity  in  Man- 
churia. Their  Excellencies  Hsii  Shih  Chang  and  Tang  Shao  Yi 
were  sent  to  Mukden  to  establish,  if  possible,  Chinese  authority 
throughout  the  Three  Eastern  Provinces,  and  to  exercise 
the  right  to  develop  this  region  under  Chinese  auspices,  assured 
by  the  Portsmouth  Treaty  and  the  so-called  Komura  Con- 
vention, signed  between  China  and  Japan  in  the  autumn 
of  1905. 

They  had  no  intention  of  interfering  with  the  treaty  rights 
acquired  by  Japan,  but  they  wished,  if  possible,  to  induce 
British,  German,  French  and  American  capitalists  to  invest 
in  the  development  of  this  region. 

In  the  autumn  of  1907,  Lord  ffrench,  representing  Messrs. 
Pauling  &  Company,  the  well  known  firm  of  English  contractors 
signed  with  the  Manchurian  Viceroy  a  contract  for  the  con- 
struction of  a  railroad  from  Hsinmintun  a  point  on  the  Peking- 
Mukden  Railway,  to  Fakumen,  with  the  ultimate  object  of  ex- 
tending this  line  north  to  Tsitsihar  on  the  Chinese  Eastern  Rail- 
way. Japan  protested  on  the  ground  that  the  construction  of 
such  a  road  would  violate  the  provisions  of  the  secret  protocol 
attached  to  the  Komura  Convention,  stipulating  that  China 
should  build  no  railway  parallel  to  or  competing  with,  the 
South  Manchurian  Road. 

Subsequently  in  the  summer  of  1908,  His  Excellency  Tang 
Shao  Yi  signed  a  Memorandum  of  Agreement  for  a  loan  of 
$20,000,000.,  to  be  undertaken  by  American  capitalists  for 
the  establishment  of  a  bank  which  was  to  act  as  the 
financial  agent  of  the  Manchurian  administration  for  develop- 
ment work.  This  marked  the  beginning  of  the  negotiations 
which  led  to  the  organization  of  the  American  Group,  the  sig-' 
nature  of  the  Chinchou-Aigun  Railway  Loan  Agreement,  the 
conclusion  of  the  Currency  Loan  and  the  formation  of  the  pres- 
ent Six  Power  Group. 

In    May    1908    Congress   had   approved  President  Roose- 


velt's  recommendation  that  the  United  States  return  to  China 
a  portion  of  the  Boxer  indemnity.  Senator  Root,  then  Secre- 
tary of  State,  and  His  Excellency  W.  W.  Rockhill,  then  Ameri- 
can Minister  to  China,  suggested  that  the  remitted  funds 
should  be  expended  in  financing  the  education  of  Chinese 
students  in  the  United  States. 

His  Excellency  Tang  Shao  Yi  was  appointed  Special  Am- 
bassador, ostensibly  to  thank  the  American  Government 
for  its  generous  action.  His  real  mission  was  to  negoti- 
ate the  Manchurian  Loan  with  American  bankers.  On 
arriving  in  Washington,  however,  he  advocated  a  much  more 
comprehensive  scheme.  He  proposed  to  Secretary  Root  that 
China  should  issue  a  loan  of  $300,000,000.  to  be  utilized  for  a 
programme  of  industrial  development,  for  currency  reform,  and 
to  finance  the  Chinese  Administration  during  the  period  follow- 
ing the  intended  abolition  of  likin  and  until  the  consent  of  all 
the  Powers  to  an  increase  in  the  customs  tariff  was  obtained. 
Mr.  Tang  desired  an  international  loan  in  which  he  wished  the 
United  States  to  take  the  lead  and  Mr.  Root  promised  to  sup- 
port this  plan.  With  the  authority  of  Mr.  Root  and  the  sanc- 
tion of  President  Roosevelt  the  matter  was  brought  to  the 
attention  of  American  bankers,  but  it  was  necessary  temporarily 
to  abandon  the  project  owing  to  the  dismissal  of  His  Excellency 
Yuan  Shih  Kai  from  the  high  office  which  he  then  held  in 
Peking. 

Following  the  inauguration  of  Mr.  Taft,  however,  the  Presi- 
dent and  Mr.  Knox  became  keenly  interested  and  the  Depart- 
ment of  State  desired,  as  soon  as  an  opportune  moment  should 
arise,  to  reopen  the  question  of  customs  revision  and  likin 
abolition,  as  well  as  currency  reform,  in  accordance  with  the 
stipulations  of  our  Commercial  Treaty  with  China  of  1903. 
With  a  view  to  taking  up  the  proposed  loan  at  the  proper 
time,  the  American  bankers,  who  had  been  interested,  closely 
followed  the  situation. 

In  May  1909  it  became  known  that  the  British,  French  and 
German  financial  groups  were  about  to  conclude  an  agreement, 


10 

to  be  secured  on  provincial  revenues,  for  the  construction  of 
the  Hukuang  Railways,  i.e.,  the  lines  from  Hankow  into 
Szechuan  and  from  Hankow  to  Canton. 

The  Department  of  State  held  the  promise  of  the  Chinese 
Government  that  if  any  foreign  money  were  required  for  the 
construction  of  the  Hankow-Szechuan  Line  one-half  should  be 
secured  from  American  and  one-half  from  British  capitalists. 
The  fact  that  internal  taxes,  upon  whose  abolition  the  con- 
templated increase  of  the  Maritime  Customs  tariff  depended, 
were  being  pledged  as  security  for  the  new  railway  loan,  directly 
affected  the  fulfillment  of  the  engagement  which  the  Depart- 
ment of  State  had  made  to  assist  China  in  obtaining  from  the 
other  Powers  their  consent  to  customs  revision. 

In  order,  therefore,  that  the  United  States  might  be  entitled 
to  a  practical,  and  not  a  merely  theoretical,  voice  in  this  matter, 
as  well  as  to  assure  to  American  manufacturers  a  share  in  the 
profits  of  Chinese  railway  construction  and  the  business  arising 
therefrom,  it  was  essential  that  representative  American 
capitalists  should  participate  in  the  Hukuang  Loan.  The 
Department  of  State  offered  this  opportunity  to  the  bankers 
already  interested  in  the  loan  proposed  by  Mr.  Tang  Shao  Yi 
and  the  American  Group  was  organized  creating  an  instru- 
ment which  it  was  hoped  might  enable  the  Administration  not 
only  to  further  the  interests  of  American  trade  but  effectively 
to  assist  China  in  obtaining  the  consent  of  the  Powers  to  the 
customs  revision  she  so  greatly  desired. 

In  the  autumn  of  1909,  immediately  following  the  organiza- 
tion of  the  American  Group,  a  preliminary  agreement  was 
entered  into  with  the  Viceroy  of  Manchuria,  by  the  American 
Group  and  Messrs.  Pauling  &  Co.,  for  the  construction  of  the 
Chinchou-Aigun  Railway.  Much  has  been  written  regarding 
this  subject  and  in  Europe  especially,  our  Government  has 
been  criticized  for  the  so-called  Manchurian  "  Neutralization 
Proposals  "  advanced  toward  the  close  of  1909,  and  which  were 
politely  declined  by  Japan  and  Russia  at  the  beginning  of  the 
following  year.     Although  the  story  of  the  inception  of  this 


11 

project  does  not  perhaps  fall  directly  within  the  scope  of  this 
paper,  it  may  be  well  here  to  recite  certain  facts  in  connection 
therewith  which,  had  they  been  known,  might  have  given  a 
very  different  complexion  to  journalistic  comment  at  the  time. 

The  scheme  of  bringing  the  Russian  and  Japanese  railroads 
in  Manchuria  under  the  control  of  a  great  international  com- 
pany was  first  conceived  by  the  late  Mr.  E.  H.  Harriman,  as  a 
factor  necessary  to  the  realization  of  his  dream  of  creating  a 
"  round  the  world  "  transportation  system. 

At  the  close  of  the  Russo-Japanese  War,  Mr.  Harriman 
visited  the  Far  East.  In  September,  1905,  working  closely 
with  the  Hon.  Lloyd  Griscom,  then  American  Minister  to  Japan, 
he  drew  up  with  the  late  Prince  Ito  and  Count,  now  Prince, 
Katsura  then  Premier  of  Japan,  a  memorandum  stipulating  that 
the  portion  of  the  Chinese  Eastern  R.  R.  from  Kwangchengtze 
to  Port  Arthur  and  Dalny  (now  known  as  the  South  Manchu- 
rian  Railway),  which  had  been  acquired  by  Japan  from  Rus- 
sia under  the  provisions  of  the  Portsmouth  Treaty,  should  be 
financed  by  an  American  loan  and  operated  under  joint 
Japanese  and  American  direction. 

This  project  was  never  realized.  It  was  blocked  by  the  late 
Marquis  Komura,  who,  raised  what  appeared  to  be  insuper- 
able objections  to  Mr.  Harriman's  plan. 

Mr.  Harriman  however,  did  not  give  up  his  idea.  Agents  of 
the  Russian  Government  during  1906-1907  proposed  to  certain 
American  bankers  that  they  purchase  from  Russia  the  portion  of 
the  Chinese  Eastern  Railway  which  remained  in  Russian  hands 
at  the  end  of  the  war,  i.e.  the  line  running  across  Northern  Man- 
churia, with  its  branch  from  Harbin  south  to  Kwangchengtsze. 
The  Russians  stated  that  they  were  willing  to  sell  in  case  Japan 
also  could  be  persuaded  to  dispose  of  the  South  Manchurian 
Railway. 

In  this  connection  it  should  be  remembered  .that  the  agree- 
ment between  China  and  the  Russo-Asiatic  Bank  for  the  con- 
struction of  the  Chinese  Eastern  Railway,  provided  that 
China  might  repurchase  the  line  after  36  years  and  that  it 


12 

would  in  any  case  revert  to  China  at  the  termination  of  an 
eighty  year  period. 

Japan  under  the  Komura  Convention  had  been  recognized 
by  China  as  successor  to  the  Russian  rights,  under  this  agree- 
ment, to  the  portion  of  the  road  acquired  after  the  war. 

It  was  proposed  therefore  that  an  international  syndicate 
should  anticipate  the  operation  of  this  clause  and  repur- 
chase the  line  on  China's  behalf,  at  this  time,  rather  than 
later. 

The  scheme  was  discussed  with  Mr.  Tang,  during  his  stay 
in  Washington,  in  the  autumn  of  1908  and  he  expressed  the 
opinion  that  China  would  be  glad  to  co-operate.  An  important 
Japanese  financier  who  had  been  informally  advised  of  the 
plan,  however,  stated  that  Japan  would  be  unwilling  to 
acquiesce  therein. 

Notwithstanding  this  fact  the  negotiations  with  Russia 
were  continued  and,  in  the  summer  of  1909,  Mr.  Harriman, 
through  a  leading  Paris  banker,  approached  M.  Kokovtseff, 
then  Minister  of  Finance,  now  Premier,  of  Russia,  and  was 
assured  that  on  his  return  from  a  trip  to  Vladivostock,  upon 
which  he  was  about  to  start,  M.  Kokovtseff  would  recommend 
the  sale  of  the  Russian  Railway.  This  he  did  in  a  public 
address  on  his  return  to  Moscow. 

The  existence  of  the  Harriman  memorandum,  and  the  attitude 
of  the  Russian  Minister  of  Finance  aside  from  the  broader 
political  considerations  involved,  justified  the  American  pro- 
posals. An  entente  had  been  arranged  between  Japan  and 
Russia,  however,  in  1907.  Both  powers  were  greatly  disturbed 
by  the  neutralization  scheme  and  thanks  to  the  understanding 
reached  by  M.  Isvolsky  the  Russian  Minister  for  Foreign 
Affairs,  and  Baron  Motono  the  Japanese  Ambassador  in  St. 
Petersburg,  they  refused  to  join  in  Secretary  Knox's  plan. 
Russian  objections  to  the  Chinchou-Aigun  project,  as  well 
as  the  conditions  imposed  by  Japan  as  precedent  to  her  partici- 
pation therein,  moreover  prevented  the  construction  of  this  road. 

Furthermore  lest  there  should  be  any  further  misunderstand- 


13 


ing  as  to  their  attitude  these  powers  in  the  convention  of  July 
4th,  1910  agreed  jointly  to  safeguard  their  respective  interests 
in  Manchuria— an  arrangement  which,  though  undoubtedly  a 
natural  one,  was  not,  it  must  be  admitted,  calculated  to  assure 
to  China  herself  the  right  to  develop  this  territory. 

In  May,  1910  an  arrangement  was  reached  with  the  French, 
German  and  British  Groups  for  the  participation  of  the 
American  Group  in  the  Hukuang  Loan.  At  this  time  the  three 
groups  first  mentioned  invited  the  American  Group  to  join  them 
in  the  combination  which  they  had  effected  the  year  before  for 
undertaking  Chinese  loans. 

This  invitation  was  later  accepted  and  an  intergroup  agree- 
ment was  signed  in  November  1910. 

On  October  27th  of  that  year  the  American  Group  had  con- 
cluded a  preUminary  agreement  for  a  £10,000,000.  loan,  to 
finance  China's  currency  reform  and  to  undertake  certain 
industrial  enterprises  in  Manchuria. 

When  the  American  Group  was  first  organized,  and  actively 
supported  by  the  State  Department,  was  seeking  participation 
in  the  Hukuang  Loan,  Secretary  Knox  had  declared  that  the 
American  Government  believed  that  the  interests  of  China  and 
of  international  trade  with  that  country  could  best  be  served 
by  the  friendly  co-operation  of  the  great  lending  nations  and 
their  banking  groups. 

It  was  in  pursuance  of  this  policy  that  the  American  Group 
entered  into  the  combination  with  the  other  groups  and  ad- 
mitted them  to  equal  participation  in  the  Currency  Loan,  the 
final  contract  for  which  was  signed  on  April  15th,  1911. 

The  final  agreement  for  the  Hukuang  Loan  was  also  signed 
with  China  by  the  same  parties  on  May  20th  of  that  year. 

In  the  present  negotiations  with  China  for  the  Reorganization 
Loan,  as  in  fact  in  all  loan  negotiations  during  the  past  few 
years,  the  banking  groups  have  found  their  greatest  difficulty 
in  the  settlement  of  the  question  of  "  control."  It  may  be  well 
therefore  before  giving  the  story  of  the  recent  negotiations  to 
review  briefly  the  history  of  this  much  discussed  term. 


14 

The  word  "  control "  has  for  some  time  commonly  been  used 
to  denote  the  guarantees  against  improper  expenditure  of  loan 
funds  which  the  banking  groups,  in  a  greater  or  less  degree, 
have  insisted  upon  securing  and  to  which  the  Chinese  Govern- 
ment has  from  time  to  time  reluctantly  agreed,  and  constantly 
endeavored  to  modify. 

"  Control  "  in  the  at  present  accepted  sense  of  the  word  was 
first  embodied  in  the  Agreement  made  by  the  Chinese  Govern- 
ment in  1898,  with  the  British  and  Chinese  Corporation,  for  a 
loan  to  the  Imperial  Railways  of  North  China. 

Under  this  Agreement,  and  in  several  others  concluded  at 
about  this  time,  the  lenders,  besides  securing  a  first  mortgage 
on  the  railway  whose  construction  they  financed,  were  entitled 
to  a  share  in  the  profits  of  the  line. 

For  this  reason  and  also  because  of  the  inexperience  of  the 
Chinese  in  railway  matters,  the  bankers  required  assurances 
that  the  loaned  funds  should  be  so  expended  that  the  mort- 
gaged property  would  constitute  a  sufficient  security. 

They  furthermore  obtained  a  certain  share  in  the  manage- 
ment of  these  lines  in  order  that  there  should  be  secured  there- 
from an  adequate  return,  (to  a  certain  percentage  of  which  the 
Banks  were  entitled)  and  to  prevent  the  administrative  in- 
efficiency and  fraud  which  they  feared  if  the  operation  of  these 
railways  were  placed  entirely  in  Chinese  hands. 

The  original  railway  loan  agreements  embodying  the  provi- 
sions above  described  were  all  concluded  prior  to  the  Boxer 
outbreak  of  1900. 

The  final  Shanghai-Nanking  and  Canton-Kowloon  Agree- 
ments (the  Canton-Kowloon  Agreement  slightly  modified  the 
**  Shanghai-Nanking  "  terms)  confirming  these  stipulations 
were  signed  in  1904  and  1907  respectively.  The  Tientsin- 
Pukow  Loan  Agreement  concluded  in  1908,  however,  substan- 
tially altered  these  conditions. 

Its  signatiire  marked  the  first  recognition  by  the  Banks  of  the 
increasing  efficiency  of  the  "  Young  China  "  party.  These  men 
demanded  the  radical  modification  of  the  old  loan  terms. 


15 

They  considered  "  control  "  subversive  of  China's  sovereign 
rights  and  flattered  by  the  blandishments  of  rival  foreign  in- 
terests, they  were  determined  to  exact  from  the  World  a 
consideration  similar  to  that  accorded  Japan  after  years  of 
patriotic  self-sacrifice  and  conscientious  endeavor.  The 
avowed  purpose  of  these  officials  to  weaken  the  hold  of  the 
foreigner  on  China  was  heartily  applauded  throughout  the 
provinces.  It  served  as  a  patriotic  issue  on  which  an  appeal 
could  be  made  to  the  masses  and  a  cloak  under  which  the  pro- 
vincial gentry  could  cover  their  real  purpose,  which  was  to 
restrict  the  extension  of  the  Peking  Government's  authority 
by  railways  built  with  foreign  loans,  or  otherwise,  and  their 
determination  that  if  foreign  loans  were  made,  the  chances  for 
peculation  should  not  be  monopolized  by  the  metropolitan 
mandarins. 

Under  the  Tientsin-Pukow  contract  the  Chinese  Government, 
by  a  cash  payment  redeemed  the  right  held  by  the  Banks 
under  the  original  agreement  signed  in  1898,  to  a  share  in  the 
profits  of  the  Railway.  No  mortgage  on  the  line  was 
given.  The  loan  service  was  to  be  met  from  the  earnings  of 
the  road  or  from  certain  provincial  taxes;  and  in  this 
Agreement  it  was  for  the  first  time  stipulated  that,  in  case  of 
default  on  the  loan  service,  the  hypothecated  revenues  should 
be  administered  by  the  Maritime  Customs  Service.  The 
principle  of  joint  management  was  abandoned.  The  Banking 
Groups,  however,  insisted  that  the  Chinese  Government  should 
employ  foreign  engineers  for  the  construction  of  the  line,  and 
during  the  life  of  the  loan,  and  that  requisitions  on  loan  funds 
specifying  the  purposes  for  which  these  sums  were  to  be 
applied  should  be  signed  by  the  Director  General.  The  con- 
struction accounts  of  the  railway  were  to  be  open  to  examina- 
tion by  foreign  auditors  to  be  appointed  by  the  Banks.  Under 
former  loan  agreements  the  auditors  had  been  empowered  to 
stop  the  withdrawal  of  funds  in  case  the  Chinese  officials  were 
found  guilty  of  peculation.  This  authority  was  not  conferred 
by  the  Tientsin-Pukow  contract  and  the  effect  of  this  modifi- 
cation soon  became  apparent. 


16 

The  so-called  "  Tientsin-Pukow  "  terms  did  not  prove  to  be 
an  effective  guarantee  against  "  graft." 

From  the  commencement  of  the  construction  of  this  line  there 
have  been  numerous  scandals,  the  most  flagrant  instance 
resulting  in  the  degradation  of  the  Director  General  and  a 
number  of  his  subordinates.  The  cost  of  construction  has  far 
exceeded  even  the  most  liberal  estimates,  and  the  loan  service 
will  therefore  constitute  a  heavy  charge  on  the  revenues  of 
the  line. 

Owing  to  the  unsatisfactory  operation  of  the  so-called 
"  Tientsin-Pukow "  terms,  negotiations  were  conducted  in 
the  winter  of  1908-1909  between  the  British,  German  and 
French  Groups  and  their  respective  Governments  with  a 
view  to  reaching  an  understanding  as  to  the  degree  of 
"  control  "  to  be  demanded  from  China  as  a  condition  prece- 
dent to  future  loans. 

There  are  different  versions  as  to  the  exact  course  of  events 
in  China  at  this  time.  It  is,  however,  sufficient  to  state  that 
in  conducting  pour-parlers  with  the  Chinese  authorities  for  a 
loan  to  construct  the  Canton-Hankow  Railway,*  the  represen- 
tative of  the  British  and  Chinese  Corporation  at  Peking  i'e- 
fused  to  agree  to  "  Tientsin-Pukow  "  terms  and  insisted  on 
more  effective  "  control  ".  The  representative  of  the  German 
Group,  however,  accepted  these  conditions  and  secured 
the  contract.  The  diplomatic  protests  and  recriminations 
amongst  the  bankers  which  followed  resulted  in  a  compromise 
under  which  the  British  and  Chinese  Corporation  was  sub- 
ordinated to  the  Hongkong  and  Shanghai  Bank,  which  with  its 
French  associates,  combined  with  the  German  Group,  to 
negotiate  a  loan  to  cover  not  only  the  Hankow-Canton  but  the 
Hankow-Szechuan  Railways.  The  Agreement  was  initialled 
on  the  6th  of  June  1909  and  the  "  control  "  provisions  accepted 
by  the  Banks  were  similar  to  those  embodied  in  the  Tientsin- 
Pukow  Agreement. 

*British  capital  had  obtained  a  "  preference  "  for  financing  the  con- 
struction of  this  road.     (See  §  3,  Page  2) 


17 

The  inclusion  of  the  loan  for  the  construction  of  the 
Hankow  Szechuan  Railway  in  this  operation  entitled  American 
interests  to  the  participation  which  the  American  Group 
eventually  secured. 

Rivalry  between  the  British  and  German  Groups  had  en- 
abled the  Chinese  in  the  original  Hukuang  Agreement  to  secure 
"  Tientsin-Pukow  "  terms  despite  the  fact  that  the  operation 
thereof  had  demonstrated  that  more  stringent  "control" 
provisions  were  needed. 

Furthermore,  during  the  year  which  elapsed  before  an  agree- 
ment was  finally  reached  between  the  British,  German  and 
French  Groups  and  the  American  Group,  there  was  an  ever- 
increasing  "anti-loan"  agitation  in  the  provinces  through 
which  the  Hukuang  lines  were  to  be  constructed.  Provincial 
Railway  Companies*  were  formed  and  secured  from  the  vacilla- 
ting Peking  Government  rights  which  violated  the  terms  of  the 
Agreement  initialled  with  the  "Tripartite  Banks,"  and  in 
which  the  Chinese  had  agreed  the  American  Group  should  be 
given  a  participation. 

The  National  Assembly,  the  forerunner  of  the  proposed 
Chinese  Parliament  was  convoked  for  the  first  time  in  the 
autumn  of  1910.  Its  members  from  the  outset  interested  them- 
selves in  the  question  of  finance  and  showed  a  determination 
to  scrutinize  government  expenditures,  which  the  bankers  felt 
would  serve  to  restrict,  even  though  it  might  not  prevent, 
official  peculation. 

The  National  Assembly,  moreover,  was  entitled  to  pass  upon 
all  Government  loans  and  was  known  to  be  opposed  to  a  foreign 
loan  for  the  construction  of  the  Hukuang  Railways  by  the 

♦Considerable  sums,  quite  insufficient  however  to  build  the  railways  in 
question,  were  secured  by  popular  subscription,  and  in  Szechuan  province 
by  taxation  also.  Construction  work  was  commenced,  and  abandoned, 
and  in  a  number  of  weU  authenticated  cases  the  funds  obtamed  by 
the  companies  were  either  lost  by  the  Directors  thereof,  who  speculated 
heavily  in  the  Shanghai  "  Rubber  Boom,"  or  stolen  by  more  simple  and 
direct  methods.  The  demonstrated  inability  of  the  Provincial  Compames 
to  do  the  work  they  had  undertaken  was  used  by  the  Imperial  Government 
to  justify  its  very  sound  policy  of  Railway  "  Nationalization." 


18 

Central  Government,  instead  of  by  the  Provincial  Companies. 
Sheng  Kung  Pao,  Minister  of  Communications,  was  deter- 
mined, however,  to  build  the  Hukuang  lines,  and  in  response 
to  the  protests  of  the  Assembly  he  pointed  out  that  in  nego- 
tiating the  loan  in  question,  he  was  fulfilling  an  obligation 
entered  into  in  1909,  prior  to  the  convocation  of  the  Assembly, 
by  the  Grand  Councillor  Chang  Chih  Tung.  He  was  obliged 
therefore  to  adhere  as  strictly  as  possible  to  the  terms  of  the 
original  contract,  and  would  not  and  could  not  have  consented 
to  any  new  "  control  "  conditions  at  this  time. 

In  this  arrangement  the  Bankers  acquiesed,  feeling  that  the 
punishment  inflicted  after  the  Tientsin-Pukow  frauds  and  the 
surveillance  of  the  National  Assembly  over  the  expenditure  of 
loan  funds,  as  well  as  the  difficulties  by  which  the  Central 
Government  was  confronted,  justified  them  in  confirming  the 
"  control "  provisions  of  the  original  agreement. 

The  Currency  Loan  was  of  a  different  character,  coming 
under  the  head  of  "  Government  "  or  "  administrative  "  loans. 
Practically  the  only  loans  previously  falling  within  this  category 
had  been  required  to  pay  indemnities  abroad  and  there  was 
no  necessity  therefore  that  the  lenders  should  exercise 
*'  control "  over  their  expenditure.  The  Currency  Loan, 
however,  was  to  carry  out  a  definite  programme  and  not 
for  general  administrative  purposes.  The  four  Banking 
Groups  now  acting  in  harmony  believed  some  form  of  super- 
vision to  be  necessary,  and  it  was  thought  that  the  "  control  " 
machinery  devised  for  railway  loans,  could,  with  certain 
modifications  be  utilized  for  assuring  the  proper  application  of 
the  borrowed  funds  under  the  Currency  Reform  Programme. 

The  Chinese  had  reluctantly  agreed  to  various  control  pro-' 
visions  in  Railway  Loan  Agreements,  but  they  feared  that  to 
admit  the  principle  of  supervision  over  administrative  expendi- 
tures would  be  to  pave  the  way  for  foreign  control  over  China's 
general  finances.  An  arrangement  was  finally  made,  however, 
whereby  China  submitted  to  the  Groups  her  programme  of 
Currency  Reform  for  their  acceptance,  and  agreed  to  expend 


19 

the  loan  funds  only  in  accordance  therewith,  to  publish  quar- 
terly reports  of  disbursements  made,  and  to  engage  a  foreign 
expert  to  assist  the  Bureau  of  Currency  Reform. 

The  loan  has  not  been  issued  but  it  is  open  to  question 
whether  this  "  control,"  in  practice,  would  have  prevented 
peculation,  and  insured  the  proper  expenditure  of  loan  funds, 
and  the  effective  operation  of  the  Currency  Reform  Programme. 

Immediately  following  the  outbreak  at  Wuchang,  on  October 
11th,  1911,  which  marked  the  beginning  of  the  revolution*  in 
China  the  representatives  of  the  four  banking  groups  in  Peking 
were  approached  regarding  a  loan  to  the  Imperial  Government. 
The  Manchus,  however,  seemed  unable  to  cope  with  the  rapidly 
developing  revolt  and  the  Groups  were  unwilling  to  advance 
funds  to  a  government  whose  continued  existence  seemed 
problematical.  Their  Governments  moreover  decided  to 
observe  absolute  neutrality  as  between  the  contending 
factions  and  refused  to  approve  any  loans  to  either  side.  The 
financial  history  of  the  Revolution  has  been  ably  told  by  Mr. 
George  Bronson  Rea  in  the  Far  Eastern  Review  and  in  this 
account  those  who  are  interested  may  read  of  the  various 
negotiations,  practically  all  of  them  unsuccessful,  undertaken 
by  both  the  Imperial  and  Republican  authorities  during  this 
period. 

*It  has  been  generally  stated  that  the  disturbances  in  Szechuan  province 
in  August  and  September  last  marked  the  beginning  of  the  revolutionary 
movement.  This  is  not  the  case  except  that  the  general  unrest  created 
thereby  contributed  to  the  rapid  spread  of  anti-Manchu  sentiment.  The 
Szechuan  agitation  is  said  to  have  been  directed  against  the  "  National- 
ization" of  Railways,  and  the  Banking  Groups  therefore  have  been 
accused  of  being  the  indirect  cause  of  the  revolt.  This  again  is  not  true. 
The  agitation  was  not  against  Railway  "  Nationalization  "  which  the 
most  intelligent  leaders  of  Chinese  public  opinion  recognized  as  desirable, 
but  against  the  manner  in  which  it  was  carried  into  effect.  Shung  Kung 
Pao,  the  Minister  of  Communication,  upon  the  signature  of  the  Hukuang 
Loan  Agreement  took  steps  to  repurchase  the  rights  of  the  Provincial  Com- 
panies in  accordance  with  the"  Nationalization  "  plan.  Incidentally,  it 
isreportedon  the  best  authority,  he  bought  up  the  major  portion  of  some 
of  the  Provincial  bonds,  and  offered  to  redeem  them  at  par.  He  did  not 
acquire  control  of  the  Szechuan  bonds  and  therefore  offered  only  60  per 
cent  on  the  face  value.     Hence  the  riots. 


20 

The  Prince  Regent  of  China  retired  on  December  6th,  1911, 
turning  over  the  reins  of  government  to  Yuan  Shih  Kai,  whom 
he  had  dismissed  three  years  before  at  a  time  when  he  stood 
out,  as  he  does  today,  as  the  only  man  capable  of  coping  with 
China's  domestic  troubles  and  the  difficulties  by  which  she  is 
threatened  from  abroad. 

The  Emperor  abdicated  on  February  12, 1912,  and  on  March 
10th  Yuan  Shih  Kai  was  inaugurated  as  provisional  President 
of  the  Chinese  Republic. 

The  present  loan  negotiations  with  the  Chinese  Government 
were  commenced  in  the  middle  of  February,  when  the  acting 
Minister  of  Finance,  His  Excellency  Chou-Tzu-Chi,  approached 
the  representatives  of  the  so  called  "  Four  Groups  "  (i.  e., 
British,  German,  French  and  American)  at  Peking,  and  asked 
for  an  immediate  loan. 

On  February  26th,  Mr.  Tang-Shao-Yi,  representing  the 
Republican  Authorities  at  Nanking,  arrived  in  Peking  for  the 
purpose  of  arranging  a  Coalition  Government.  On  the  follow- 
ing day,  at  Mr.  Tang's  invitation,  the  representatives  of  the 
Four  Groups  discussed  with  him  the  question  of  the  loan 
broached  some  days  before. 

Mr.  Tang  stated  the  immediate  requirements  of  the  Chinese 
Government,  and  requested  the  representatives  to  ask  their 
Groups  to  finance  the  same.  In  addition  he  discussed  the 
Chinese  Revenues  available  as  security  for  a  large  loan  to  re- 
organize the  Chinese  Administration,  and  to  initiate  a  scheme 
of  commercial  and  industrial  development.  He  asked  the  rep- 
resentatives how  much  China  could  borrow  on  this  security, 
and  finally,  himself  suggested  the  figure  of  £60,000,000,  which 
he  wished  the  Banks  to  loan  in  five  annual  instalments  of 
£12,000,000  each. 

Pursuant  to  Mr.  Tang's  request  for  an  immediate  advance, 
the  Groups  on  the  following  day  paid  in  Shanghai  the  sum  of 
Taels  2,000,000,  to  meet  the  urgent  requirements  of  the  Nanking 
authorities. 


21 

The  four  representatives  had  reported  Mr.  Tang's  request 
to  their  principals  in  Europe  and  America.*  No  reply  had  been 
received  when  on  the  night  of  February  29th  a  number  of  the 
Chinese  Troops  quartered  in  Peking  mutinied,  looted  and 
burned  portions  of  the  city,  and  openly  defied  the  authority 
of  the  Provisional  Government.  On  the  following  day,  March 
1st,  it  was  suggested  to  Mr.  Tang  that  it  would  be  desirable  that 
he  should  make  some  statement  to  reassure  the  Groups  who 
were  considering  his  proposition,  regarding  the  probable  effect 
of  the  outbreak,  and  the  ability  of  the  Government  to  cope 
therewith. 

Mr.  Tang's  explanation  was  unsatisfactory,  and  the  burning 
and  looting  continued  on  the  night  of  March  1st.  On  March 
2nd,  acting  under  instructions  from  Yuan-Shih-Kai,  the  acting 
Minister  of  Finance  requested  from  the  Four  Groups  an  im- 
mediate advance  of  1,015,000  Taels.  He  stated  in  his  letter 
that  the  President  appreciated  that  in  view  of  the  critical  state 
of  affairs  in  Peking,  the  Groups  would  not  be  prepared  to  lend 
this  money  without  the  authority  of  their  Governments,  and 
requested  the  representatives  to  secure  the  necessary  sanction 
from  their  Ministers  as  soon  as  possible. 

Though  Mr.  Tang  in  order  to  justify  the  signature  of  the 
"  Belgian  loan  "  subsequently  stated  that  the  Groups  had  refused 
to  render  assistance  when  approached  after  the  mutiny  of  Feb- 
ruary 29th,  no  other  requests  for  immediate  advances  other  than 
that  mentioned  above  was  received  by  the  Groups  at  this  time. 

The  seriousness  of  the  situation  at  this  time  is  shown  by  the 
fact  that  on  the  same  day  Mr.  Tang-Shao-Yi  had  addressed  a 
note  to  the  British  Minister  stating  that  he  feared  the  Peking 

*A  number  of  writers  on  this  subject  have  stated  that  on  February 
27th  the  Group  representatives  made  a  definite  agreement  to  furnish 
certain  sums.  This  is  not  true.  The  Group  representatives  merely 
agreed  to  report  Mr.  Tang's  proposition  to  their  principals.  They 
did,  however,  in  view  of  the  urgent  need  of  funds  in  Nanking 
(it  was  feared  that  the  troops  might  mutiny  if  not  paid  immediately) 
themselves  assume  the  responsibility  of  making  the  advance  of  Tls. 
2,000,000,  referred  to  in  the  final  paragaph  of  the  preceding  page. 


22 

Authorities  would  no  longer  be  able  to  control  the  situation, 
and  requesting  the  Diplomatic  Corps  to  take  steps  to  assist 
the  Chinese  in  preserving  order.  Yuan-Shi-Kai  later  denied 
having  authorized  Mr.  Tang  to  take  this  action. 

On  March  9th  the  necessary  authority  having  been  received 
from  the  Four  Governments,  the  Groups  advanced  the  sum 
requested  under  an  exchange  of  letters,  which 

1.  Assured  to  the  Groups  the  firm  option  for  furnishing 
"  the  further  monthly  requirements  of  the  Chinese 
"  Government  for  the  months  of  March,  April,  May  and 
"  June,  and  if  necessary,  July  and  August  "  and 

2.  In  view  of  the  assistance  rendered  the  Chinese 
Government  in  advancing  the  sums  mentioned  above 
as  well  as  in  undertaking  the  contemplated  advances  for 
monthly  requirements  and  maintaining  Chinese  credit 
on  the  markets  of  the  world  (by  paying  Chinese  loan  in- 
terest coupon  charges  which  the  Chinese  Government 
itself  had  been  unable  to  meet),  the  Chinese  Government 
assured  to  the  Groups  the  firm  option  on  the  Reorganiza- 
tion Loan  (provided  their  terms  were  equally  advantageous 
with  those  otherwise  obtainable). 

From  the  proceeds  of  this  projected  Reorganization  Loan  it 
was  intended  to  redeem  the  Treasury  Bills,  which  were  to  be 
issued  to  cover  the  advances. 

So  urgent  were  the  needs  of  the  Chinese  Government, 
that  the  Four  Groups  did  not  at  this  time  arrange  the 
terms  upon  which  they  would  discount  these  Bills,  it  being 
impossible  to  settle  this  point  until  after  the  Conference  in 
Europe  of  the  Four  Groups,  which  had  been  called  for 
March  12th. 

The  terms  on  which  the  Groups  were  prepared  to  undertake 
this  business  were  not,  however,  communicated  to  the  Chinese 
Authorities,  for  on  the  evening  of  the  14th  the  four  representa- 
tives learned  that  an  agreement  had  that  morning  been  con- 


23 

eluded  with  the  so-called  "  Belgian  Group  "  for  a  loan  of 
£1,000,000  carrying  an  option  for  a  further  large  loan.* 

This  transaction  was  completed  at  a  time  when  the  President 
and  Mr.  Tang  knew  that  the  representatives  were  hourly 
expecting  a  definite  reply  from  the  Four  Groups  to  the 
proposals  made  by  Mr.Tang  on  February  27th. 

The  signature  of  the  "  Belgian  Loan  "  was  virtually  the  first 

official  act  involving  the  new  Administration's  relations  with 

foreigners.    It  was  a  clear  breach  of  contract.    The  Groups, 

more  especially  the  British,  French  and  German,  had  since 

the  outbreak  of  the  Revolution  in  October,  been  themselves 

advancing  funds  to  pay  interest  charges  on  Chinese  Loans 

which  they  had  issued.     They  had  done  this  to  protect  the 

public  to  which  they  had  sold  Chinese  Bonds,  and  to  protect 

the  credit  of  China  where  they  had  very  large  vested  interests. 

Despite  the  chaotic  conditions  prevailing  throughout  the 

provinces,  and  the  absence  of  any  really  effective  authority  in 

Peking  the  Groups  with  the  support  of  their  Governments  had 

been  ready  to  advance  to  China  funds  sufficient  to  put   the 

Peking  administration   on  its  feet  at  a  time  when  no  public 

issue  of  Chinese  Bonds  was  possible,  in  order  to  do  their  part 

in  assisting  the  restoration  of  stable  conditions. 

The  signature  of  the  Belgian  Loan,  however,  affected  the 
security  for  the  large  loan  which  the  Groups  had  been  asked  to 
undertake— and  it  carried  no  guarantee  whatsoever  that  the 
funds  furnished  or  to  be  furnished  would  be  properly  expended, 
it  increased  China's  liabilities  without  insuring  any  increase  in 
the  effectiveness  of  her  administration  and  instead  of  rehab- 
ilitating, it  was  calculated  to  prejudice,  her  credit. 

*The  Belgian  loan  was  secured  on  the  Peking-Kalgau  R.  R.  the  earn- 
ings of  which  together  with  the  earnings  of  other  "  productive  enter- 
prises "  controlled  by  the  Board  of  Communications,  had  been  pledged 
as  security  for  the  Anglo-French  loan  of  1908.  The  British  and  French 
Ministers  successfully  protested  against  the  alienation  of  this  security. 
The  price  paid  by  the  Bankers  for  the  Belgian  loan  was  not  as  high  as 
that  which  the  Four  Groups  were  ready  to  give— but  there  were  no 
"  control  "  provisions  in  the  contract. 


24 

The  "  Belgian  Loan  "  Contract  had  been  drawn  subject 
to  ratification  by  the  "  Advisory  Council  "  at  Nanking. 

Despite  the  protest  made  by  the  Four  Group  representatives 
on  March  15th,  Mr.  Tang  urged,  and  finally  pursuaded,  the 
Council  to  ratify  this  agreement,  on  the  ground  that  the  Four 
Groups  had  refused  to  assist  China  after  the  outbreak  of  Febru- 
ary 29th.  There  is  no  evidence  that  Mr.  Tang  at  this  time 
informed  the  Council  of  the  assistance  which  the  Groups  had 
rendered,  and  were  prepared  to  render,  or  of  the  existence 
of  the  letters  of  agreement  of  March  9th. 

The  British,  German,  French  and  American  Ministers  on 
March  25th  formally  protested  against  the  conclusion  of  the 
"Belgian"  loan.  Mr.  Tang  Shao  Yi,  then  Prime  Minister  in  the 
newly  organized  Cabinet  nevertheless  attempted  to  secure  fur- 
ther funds  from  the  "Belgian"  Group.  This  failing,  the  Chinese 
Government  on  April  15th  replied  1?o  the  Minister's  protest  des- 
cribing the  signature  of  the  "  Belgian  "  Loan — and  the  violation 
of  the  letters  of  agreement  of  March  9th,  as  a  "  misunderstand- 
ing "  and  requesting  the  Ministers  to  instruct  the  Group  repre- 
sentatives to  resume  negotiations  with  the  Premier  on  his 
return  to  Peking. 

The  Four  Ministers  refused  to  accept  the  explanation 
offered,  and  insisted  that  the  Government  should  admit  its 
breach  of  contract  with  the  Four  Groups.* 

This  condition  was  accepted  and  negotiations  were  resumed. 
During  the  next  few  weeks  the  Groups  paid  over  further 
amounts,  making  the  total  sum  advanced  12,100,000  taels,  or 
approximately  £1,800,000.  Agreements,  covering  these  later 
advances  were  signed  on  May  17th,  and  June  12th  under 
which,  after  considerable  difficulty,  the  Chinese  had  been 
persuaded  to  agree  to  the  safeguards  which  the  Groups 
considered  essential  to  assure  the  application  of  the  loan  funds 

*The  "  Belgian  "  Group  included  the  Russo-Asiatic  Bank  which  was 
later  designated  by  the  Russian  Government  to  participate  in  the  "  Six 
Power  "  Syndicate.  Under  the  Paris  agreement  of  June  20th,  1912  the 
members  of  the  "  Belgian  "  Group  were  recognized  by  the  combination 
as  members  of  the  "  Russian  "  Group. 


25 

to  the  payment  of  troops  and  to  the  other  purposes  for  which 
they  were  boi rowed. 

At  the  request  of  their  respective  governments  the  original 
four  Groups  with  the  approval  of  Yuan  Shih  Kai  had  agreed  to 
admit  banking  interests  designated  by  the  Russian  and  Japan- 
ese Governments,  to  a  participation  in  these  transactions,  and 
after  protracted  and  most  delicate  negotiations  an  agreement 
was  reached  between  the  six  Groups  on  June  20, 1912,  in  Paris, 
regarding  the  conditions  upon  which  they  were  prepared  jointly 
to  undertake  the  proposed  Reorganization  Loan  to  China. 

The  Groups  were  presented  with  the  problem  of  financing 
the  reconstruction  of  China  on  conditions  which  would  be 
attractive  to  the  bond  purchasing  public  despite  the  dis- 
organized condition  of  that  country.  To  appreciate  the 
difficulties  which  they  were  obliged  to  take  into  consideration, 
it  is  necessary  to  summarize  the  situation  existing  at  this  time. 

They  had  been  requested  by  China  to  furnish  roughly 
10,000,000  Taels  or  £1,300,000  a  month  for  six  months  and  to 
provide  other  sums  making  the  aggregate  amount  to  be  ad- 
vanced 80,000,000  Taels  or  about  £10,000,000. 

It  would  have  been  impossible  to  issue  a  Chinese  loan  at  this 
time  except  at  a  figure  so  low  as  to  prejudice  the  quotations 
for  Chinese  bonds  already  on  the  market,  in  the  hands  of  the 
public,  not  of  the  Groups.  To  furnish  the  sums  immediately 
required  therefore  the  Banks  would  have  been  obliged  to 
discount.  Treasury  Bills,  which  they  would  have  either  had 
to  hold  themselves,  or  dispose  of  to  a  very  limited  clientele. 

These  advances  were  required  to  pay  the  army,  to  finance 
the  disbandment  of  superfluous  troops,  and  to  meet  the 
current  expenses  of  the  Government.  The  large  loan  was  to 
be  expended  to  redeem  the  Treasury  Bills,  to  clear  off  arrears 
in  China's  indemnity  and  loan  services,  and  to  meet  certain 
pressing  outstanding  obligations.  Mr.  Tang  proposed  to  use  the 
balance  to  make  up  the  loss  of  likin,  which  he  desired  immed- 
iately to  abolish,  pending  the  consent  of  the  Powers  to  an  in- 
crease in  the  customs  tariff.     In  addition  he  had  certain  vague 


26 

schemes  for  railway  construction,  afforestation,  and  the  estab- 
lishment of  mills  of  various  sorts. 

For  the  advances  and  large  loan  requested  the  Chinese 
Government  proposed  to  pledge  the  Salt  Gabelle  as  security. 
The  service  of  the  Boxer  Indemnity  is  a  first  charge  on  this 
revenue.  It  was  estimated  however  that  it  now  yields  Taels 
47,000,000  per  annum — and  could  be  increased  to  at  least 
half  as  much  again  if  honestly  collected.* 

The  Chinese  Government  at  this  time  was  powerless  to  col- 
lect the  taxes  which  it  offered  as  security  and  was  unable 
to  meet  indemnity  and  loan  payments,  to  pay  troops  or  to 
finance  its  current  administrative  expenses  and  its  permanence 
was  by  no  means  assured. 

During  the  coui'se  of  the  negotiations,  from  February  to  June 
the  Chinese  officials  had  shown  little  appreciation  of  the  magni- 
tude of  their  financial  task  and  had  evinced  little  ability  in  deal- 
ing effectively  therewith. 

The  Groups  nevertheless  had  advanced  Taels  12,100,000  in 
order  to  enable  the  administration  to  meet  its  most  ui-gent 
needs  and  to  prevent  the  disorders  and  mutinies  which  it  was 
feared  would  occur  unless  funds,  which  the  Government  could 
not  secure  from  its  own  people,  were  obtained. 

These  advances  had  been  made  subject  to  certain  conditions 
to  insure  their  proper  application  to  the  purposes  for  which 
they  were  borrowed  yet  the  Chinese  officials  charged  with 
their  expenditure  had  placed  every  obstacle  in  the  way  of  a 
proper  and  efficient  audit,  to  which  they  had  agreed. 

Patriotic  Chinese,  proud  of  their  Republic  and  hopeful  and 
confident  of  its  future  may  regret  the  necessity  of  including 
such  facts  in  this  statement.  These  men,  however,  if  they  be 
fair  minded,  must  admit  that  the  Banking  Groups,  no  matter 

*Experience  at  Tientsin  and  Tsingtao  has  shown  the  enormous  increase 
that  might  be  obtained  were  this  tax  properly  administered.  In  Tientsin 
a  single  station  under  the  foreign  managed  "  Provisional  Government  " 
temporarily  installed  after  the  Boxer  outbreak,  collected  in  six  months  as 
much  revenue  as  the  entire  district  had  yielded  in  a  year.  At  Tsingtao  the 
collections  of  a  station  placed  under  foreign  direction  were  at  once 
increased  six-fold. 


27 

how  friendly  they  might  be  to  China,  would  not  have  been 
warranted  in  disregarding  them. 

Because  of  these  facts  the  Groups  were  unwilling  to  under- 
take the  business  without  the  joint  support  of  their  respective 
Governments.  Because  of  these  facts,  moreover,  they  deemed 
it  possible  to  proceed  with  advances  and  to  undertake  the  Re- 
organization Loan  only  on  certain  conditions  which  were  briefly 
as  follows: — 

First,  That  the  Groups  should  have  the  right  to  satisfy 
themselves  as  to  purposes  for  which  funds  were  required. 

Second,  That  China  should  herself  create  a  system  of  audit  in 
which  foreigners  should  be  employed  with  powers  not  merely 
advisory,  but  also  executive,  so  as  to  ensure  the  effective 
expenditure  of  funds  borrowed  for  the  purposes  specified. 

Third,  That  the  salt  taxes  to  be  hypothecated  for  the  service 
of  this  loan  should  be  administered  either  by  the  existing 
Maritime  Customs  organization  or  by  a  separate  Chinese 
service  like  the  Customs,  however,  under  foreign  direction, 
thus  safeguarding  the  proper  administration  of  the  security 
despite  the  possible  continuation  or  recurrence  of  unsettled 
conditions  in  China. 

Fourth,  That  the  Groups  should  take  the  first  series  of  the 
loan  of  £60,000,000,  at  a  fixed  price,  and  should  be  assured  an 
option  on  the  subsequent  series  at  a  price  to  be  based  on  the 
market  quotation  of  the  first  issue,  thus  giving  China  the 
benefit  of  any  improvement  in  her  credit. 

Fifth,  That  to  protect  the  quotation  of  bonds  issued  and  to 
assure  a  successful  marketing  of  subsequent  series  China  should 
not  borrow  through  other  Groups  until  after  the  entire  loan 
of  £60,000,000  had  been  issued.* 

Sixth,  That  for  a  period  of  five  years  China  should  appoint 
the  Groups  its  Financial  agents  to  assist  the  Administration  in 
its  work  of  Reorganization. 

*In  the  contract  for  the  so-called  "  Crisp  "  loan  of  £10,000,000,  China 
agreed  to  a  stipulation  which  virtually  prevented  her  from  borrowing, 
except  through  the  Crisp  syndicate,  for  the  period  of  one  year  or  until 
the  loan  had  been  issued  in  entirety. 


28 

These  conditions  were  submitted  to  the  Chinese  Government 
and  in  reply  the  Group  representatives  in  Peking  were  informed 
that  it  would  be  impossible  for  China  to  accept  a  loan  on 
such  terms.  Negotiations,  however,  though  interrupted,  were 
not  formally  broken  off,  and  from  the  end  of  June  dis- 
cussions were  continued  between  the  Chinese  officials  and  the 
Group  representatives,  but  without  result.* 

The  difficulty  was  not  a  question  of  the  price  at  which  the 
Bankers  should  take  the  bonds.  It  was  the  question  of  "  con- 
trol." The  Chinese  particularly  objected  to  placing  the  Salt 
Gabelle  under  the  Maritime  Customs,  or  any  foreign  directed 
service,  to  the  creation  of  a  proper  audit  department  and  to 
appointing  the  Groups  Financial  Agents. 

It  has  of  late  years  become  the  fashion,  particularly  among 
officials,  who  like  Tang  Shao  Yi,  and  Liang  Tun  Yen  served  for 
a  short  time  in  the  Maritime  Customs  to  criticize  Sir  Robert 
Hart  and  his  administration.  Mr.  Drew  will  give  you  an 
account  of  the  life  and  work  of  this  man,  one  of  the  truest 
friends  China  ever  had. 

The  younger  men,  however,  forget  his  splendid  service — 
they  do  not  realize  that  he  did  much  to  save  their  country,  for 
them,  from  foreign  aggression,  and  it  galls  them  to  admit  that 
for  years  the  Customs  Service  has  been,  and  is  today,  with  the 
exception  of  the  Postal  Service,  also  created  by  Sir  Robert 
Hart,  the  only  branch  of  their  entire  Government  which  can, 
if  judged  by  Western  standards,  be  termed  efficient. 

The  suggestion  that  the  Salt  Gabelle  should  be  put  under  the 
Maritime  Customs  therefore,  was  refused,  nor  would  the  Peking 
authorities  agree  to  create  a  similar  oiganization  to  under- 
take this  work.  Chinese  and  many  foreign  critics  have 
pointed  out  that  the  Customs  Service  functions  at  "the  ports 
— and  that  it  would  therefore  be  unsuitable  for  the  collec- 
tion  of  internal  revenue.     The   Postal   Service   also  under 

*  In  a  letter  dated  July  9th  addressed  to  the  Group  representatives, 
the  Minister  of  Finance  stated  that  China  could  not  agree  to  the  Group's 
terms  and  would  be  obliged  to  borrow  elsewhere.  Pour-parlers  were, 
however,  reopened  shortly  afterward. 


29 

foreign  direction,  however,  has  been  successful  in  its  work,  con- 
ducted throughout  China,  while  customs  officials  have  shown 
great  ability  in  dealing  with  likin  collectorates  and  in  solving 
customs  problems  in  the  interior  of  Manchuria. 

The  Groups  have  not  insisted  upon  the  exact  form  the 
proposed  administration  should  take.  They  have,  and  do, 
believe  that  the  salt  gabelle  does  not  constitute,  and  cannot  be 
considered,  an  adequate  security  unless  by  placing  these  taxes 
under  a  Chinese  Government  Service, — but  with  foreign 
direction,  inspectors,  and  auditors, — an  efficient  and  honest  col- 
lection be  assured. 

In  the  present  state  of  China  when  the  Peking  administra- 
tion has  by  no  means  established  its  authority — when  cabinets 
are  formed  and  dissolved  with  kaleidoscopic  rapidity,  when 
revenues  are  not  being  collected,  and  when  there  are  large  bodies 
of  armed  men  throughout  the  country,  ready  at  any  time  to 
break  into  open  revolt — the  Groups  felt  that  before  engaging  to 
undertake  so  large  a  loan  as  that  requested,  they  should  be 
able  to  be  in  a  position  to  guide  and  advise  China  in  her 
reorganization  work,  the  success  of  which  depends  primarily 
on  sound  finance.  It  was  for  this  reason  that  they  asked 
to  be  appointed  Financial  Agents. 

Many  of  the  leading  men  in  Peking  have  privately  recognized 
the  wisdom  of  the  Group's  conditions  and  the  advantages  to  be 
gained  should  China  accept  them.  Officially,  however,  these 
gentlemen  have  not  dared  recommend  their  adoption,  fearing 
that  their  political  opponents  might  make  any  concession  to 
the  foreigner  the  excuse  for  stirring  up  an  agitation  which  they 
would  be  powerless  to  quell. 

Hoping  to  obtain  less  onerous  terms  the  Minister  of  Finance 
in  July  last  proposed  that  the  Groups  should  continue  advances 
to  be  redeemed  from  a  loan  of  £10,000,000. 

This  sum,  however,  would  have  been  scarcely  sufficient  to 
meet  China's  immediate  outstanding  obligations.  The  safe- 
guards which  were  suggested  by  the  Chinese  moreover  were 
inadequate.    A  transaction  of  the  character  suggested  would 


30 

have  increased  China's  debt  when  she  was  in  default  on  exist- 
ing loans  without  creating  any  machinery  to  enable  her  better 
to  sustain  it.  The  groups  therefore  were  unable  to  negotiate 
on  this  basis.  The  officials  then  stated  that  as  the  Groups 
would  not  lend  on  "reasonable"  terms  they  would  be  obliged 
to  secure  funds  from  their  own  people.  The  Group  representa- 
tives and  the  foreign  Ministers  in  Peking  welcomed  the  sug- 
gestion, and  urged  them  to  make  a  "  popular  "  loan.  This 
was  attempted  but  without  success;  the  "  people  "  contributed 
small  sums,  but  not  enough.  The  Government  next  approached 
certain  commercial  houses  and  secured  small  loans,  in  return  for 
large  contracts  for  arms  and  ammunition.  Tramway  conces- 
sions were  offered  in  return  for  cash  advances,  and  other  expedi- 
ents adopted  to  secure  funds  sufficient  to  meet  the  Governments 
running  expenses,  all  of  which  while  calculated  to  relieve  a 
temporary  necessity  made  no  provision  for  the  future  and 
would  therefore  merely  have  increased  the  difficulties  of  an 
already  almost  hopeless  financial  problem. 

Early  in  September  it  was  reported  that  on  August  30th 
the  Chinese  Minister  in  London  had  signed  a  loan  agreement 
with  Messrs.  C.  Birch  Crisp  &  Co.,  of  London.  Enquiry 
addressed  to  the  Minister  of  Finance  in  Peking  evoked  the 
information  that  he,  the  Minister  of  Finance,  had  had  nothing  to 
do  with  the  conclusion  of  the  London  contract  which  had  been 
arranged  by  his  predecessor  acting  in  an  informal  capacity.  The 
Minister  of  Finance  assured  the  representatives  that  China 
desired  to  deal  with  the  Six  Groups  as  the  only  combination 
capable  of  furnishing  within  the  next  few  years  the  enormous 
sums  which  China  would  need  to  reorganize  her  administration 
and  finance  the  industrial  development  upon  which  the  Peking. 
Government  wished  to  embark.  At  the  time  this  discussion  took 
place  funds  advanced  by  Messrs.  C.  Birch  Crisp  &  Co.  had 
already  been  transferred  to  China  and  placed  to  the  credit  of  the 
Chinese  Government  in  a  Tientsin  bank.  This  fact  became 
known  to  the  representatives  who  brought  it  to  the  attention 
of  the  Minister  of  Finance.     He  reiterated  his  former  declara- 


31 

tion  that  China  desired  to  deal  with  the  Six  Groups  and  as  late 
as  September  23rd  handed  the  representatives  a  statement  of 
conditions  which  he  informed  them  China  would  be  ready  to 
make  the  basis  for  the  continuation  of  negotiations  for  the 
Reorganization  Loan.  These  terms  were  not  considered 
acceptable  by  the  Group  representatives.  The  Minister  of 
Finance  thereupon  informed  them  that  since  they  had  refused 
the  terms  proposed  by  China  he  considered  that  the  option 
which  the  Groups  had  held,  had  lapsed  and  that  China  was  free 
to  negotiate  with  other  parties.  The  so-called  "  Crisp  "  loan 
was  issued  in  London  shortly  afterward. 

From  the  above  facts  it  would  seem  that  the  Chinese  Govern- 
ment was  prepared  to  repudiate  the  contract  signed  with 
London  bankers  on  August  30th.,  in  case  the  Six  Groups  were 
willing  to  come  to  terms. 

This  incident,  in  connection  with  others  mentioned  above 
is  not  cited  for  the  purpose  of  impugning  the  good  faith 
of  the  Chinese  Government.  Those  familiar  with  the 
difficulties  with  which  the  Provisional  Government  has  been 
endeavoring  to  deal  are  not  inclined  to  hold  China  too 
strictly  to  account  for  what  her  real  friends  will  regard  as  mis- 
taken and  unfortunate,  rather  than  reprehensible,  efforts  to 
solve  her  financial  problem.  At  the  same  time,  with  all  possi- 
ble consideration  for  China  and  every  sympathy  for  her 
officials  in  the  performance  of  their  onerous  tasks,  it  must 
be  recognized  that  such  actions  will,  if  continued,  make  it 
impossible  to  maintain  Chinese  credit. 

It  will  be  said  perhaps  that  by  concluding  the  so-called 
"  Crisp  loan,"  China  demonstrated  her  ability  to  borrow  in  the 
markets  of  the  world,  under  an  agreement  which  contained  no 
safeguards  as  to  the  proper  expenditure  of  loan  funds.  This 
may  be  true,  but  the  fact  that  China  could  in  this  case  secure 
funds  was  due  largely  to  public  confidence  in  the  stability  of 
the  Chinese  Administration  based  on  the  willingness  of  the 
Six  Power  Group  to  advance  funds  to  the  Provisional  Govern- 
ment even  prior  to  the  inauguration  of  the  President,  Yuan 


32 

Shih  Kai,  and  the  belief  that  the  Six  Groups  would  in  the  end 
come  to  an  arrangement  with  Peking  which  would  give  value 
to  all  Chinese  securities. 

Many  gentlemen  in  the  United  States  have  pointed  out  in 
discussing  this  subject  that  the  American  banking  group  in 
particular  should  remember  the  history  of  our  own  country  and 
not  be  too  exacting  in  its  dealings  with  the  Chinese  Re- 
pubhc. 

The  comparison,  however,  is  not  justifiable  for  it  should  be 
remembered  that  when  our  Federal  Government  was  first 
established  there  was  no  large  public  debt  while  the  re- 
sources of  the  young  American  Republic  were  enormous. 
The  funds  secured  from  abroad  during  our  revolution,  and 
immediately  following  its  conclusion,  had  been  advanced 
by  the  French  Government,  not  so  much  with  the  idea  of 
assisting  the  struggling  colonies  as  for  the  purpose  of  embar- 
rassing Great  Britain.  Only  when  Alexander  Hamilton, 
had  reorganized  the  finances  of  the  country,  securing  the 
assumption  by  the  Federal  Government  of  the  larger  part 
of  the  debt  of  the  states,  and  after  he  had  put  the  adminis- 
tration of  the  Treasury  Department  on  a  sound  basis,  were  the 
United  States  able  to  borrow  from  foreign  bankers  on  satisfac- 
tory terms.  The  Ministry  of  Finance  in  Peking,  however,  is 
still  operated  on  lines  scarcely  comformable  to  our  ideas  of  a 
business  administration,  despite  the  efforts  of  able  men  like 
Dr.  Chen  Chin  Tao,  while  the  Republican  Government  has 
assumed  the  obligations  of  its  Imperial  predecessor  for  which 
the  revenues  of  China  are  to  a  very  large  degree  already  hy- 
pothecated, and  for  the  service  of  which  they  are  at  the 
present  time  insufficient. 

Not  long  ago  I  happened  to  be  present  when  the  loan  question 
was  discussed  by  a  distinguished  gentleman  who  had  just  re- 
turned from  the  Far  East.  He  had  been  greatly  impressed  by 
what  the  revolution  had  accomplished,  was  full  of  admiration 
for  the  Chinese  people  and  confident  of  the  bright  future  of  the 
Republic.     He  felt  that  the  Bankers  were  mistaken  in  demand- 


33 

ing  terms  which  the  Chinese  considered  so  onerous  and  thought 
that  the  wiser  poUcy  for  the  Groups  would  be  to  work  for  the  fu- 
ture by  now  making  concessions  calculated  to  relieve  the  Chinese 
officials  of  their  immediate  embarrassments.  He  thought  that 
for  American  merchants  the  fairest,  and  at  the  same  time  the 
ultimately  most  profitable,  attitude  to  adopt  toward  China 
was  to  strive  for  the  maintenance  of  the  "  open  door  "  under 
which  with  a  strong  Central  Government  international  trade 
would  greatly  prosper. 

He  recognized  that  the  authority  of  the  present  Peking 
Administration  was  not  generally  established  in  the  prov- 
inces, that  revenues  were  not  being  collected  and  that  with- 
out money  the  Central  Government  could  not  become  strong. 
He  admitted  that  while  he  had  met  many  officials  he  had 
seen  few  whom  he  considered  competent  to  direct  the  ex- 
penditure of  large  sums  in  the  manner  most  likely  to  assure  the 
speedy  restoration  of  normal  conditions  throughout  the  coun- 
try and  he  believed  therefore  that  the  Chinese  Government 
should  employ  advisers  and  accept  their  advice. 

The  distinguished  traveller  had  predicated  his  hope  for  the 
future  on  the  establishment  of  a  strong  Central  Government 
which  would  be  able  to  collect  sufficient  revenue  to  finance 
its  own  reorganization.  Unfortunately,  however,  this  cannot 
be  accomplished  unless  the  Chinese  Government  first  secures 
from  abroad  money  sufficient  to  give  it  the  power  to  make 
these  collections  and  pay  off  its  pressing  debts  under  safeguards 
which  will  protect  it  for  the  time  being  from  external' aggression. 

If  his  conclusions  as  to  the  ability  of  Chinese  officials  now  in 
power  were  warranted,  and  his  observations  correct  regarding 
the  present  state  of  affairs  in  China,  his  recommendation 
that  the  Groups  "  play  for  the  future,"  by  lending  money  on 
terms  acceptable  to  the  Chinese,  would  scarcely  seem  jus- 
tified by  his  premises.  Those  who  have  lived  in  China  and  grown 
to  know  and  admire  the  Chinese,  however,  will  readily  un- 
derstand this  point  of  view.  It  is  impossible  not  to  sympathize 
with  the  aspirations  of  the  young  men  who  are  now  striving  to 


34 

do  what  they  can  for  their  country.  At  the  same  time 
American  bankers  would  not  be  acting  as  true  friends  of  China 
if  they  failed  to  look  the  facts  of  the  situation  in  the  face.  They 
would  not  be  "playing  for  "  the  best  future  for  China  should 
they  lend  money  on  conditions  which  might  satisfy  the  vanity 
of  Chinese  officialdom  but  which  instead  of  assisting  the  estab- 
lishment of  a  strong  central  Government  would  encourage  im- 
provident financial  methods  and  lead  inevitably  to  foreign 
intervention. 

The  present  financial  situation  in  China  is  set  forth  in  an 
article  in  the  "  North  China  Herald  "  of  Sept.  28th  1912— 
an  abstract  of  which  is  given  below: 


"  The  obligations  that  China  is  bound  to  liquidate  are  as 
follows.  First  of  all,  Tls.  12,000,000  advanced  by  the  Sextuple 
Group  from  February  to  July,  on  the  distinct  understanding 
that  the  Chinese  Government  would  sign  the  loan  with  them, 
including  this  sum  in  the  total  amount  for  which  the  loan  is 
signed.  The  Chinese  Government  gave  the  banks  treasury 
bills,  and  at  the  exchange  fixed  the  total  works  out  at  £1,750,000 
sterling.  Secondly,  there  are  amounts  due  to  the  shipbuilding 
firms  in  England  and  the  United  States  for  works  executed  by 
them  on  orders  given  by  the  Manchu  Government  but  com- 
pleted during  this  year.  In  the  list  of  their  outstanding 
debts  furnished  by  them  to  the  Sextuple  Group  the  Chinese 
Government  have  £700,000  against  this  item. 

Thirdly,  there  are  the  Hupeh  and  Nanking  loans  of  about 
£300,000  each  given  by  the  banks  to  the  Viceroys  of  the  two 
provinces  on  the  authority  of  Peking  during  the  Manchu  regime. 
These  sums  have  been  overdue  for  some  time,  and  as  the  new 
Government  has  undertaken  responsibility  for  all  the  past  obli- 
gations they  must  be  paid  the  moment  it  obtains  funds.  Fourth- 
ly, there  are  two  loans  contracted  at  recent  dates  on  the  under- 
standing that  they  would  be  repaid  as  soon  as  China  signed  the 
big  loan.  The  Diederichsen  loan  of  Mks.  5,000,000  and  the 
Carlo witz  loan  of  Tls.  6,000,000  come  under  this  category. 
Part  of  these  amounts  was  received  in  cash,  although  the  major 
portion  consisted  of  amounts  due  on  arms  and  ammunition 
supplied  by  these  firms  during  the  revolution. 

Fifthly,  the  Skoda  loan  contracted  with  Arnold,  Karberg  & 
Co.  during  the  revolution,  the  moiety  of  which  was  received 
in  cash  and  the  rest  in  the  shape  of  arms  and  ammunition, 
amounts  to  about  £450,000.  Sixthly,  as  the  currency  loan  was 
floated  by  members  of  the  Group,  and  as  it  is  not  likely  to  be 
floated  by  them  if  the  present  arrangements  are   continued, 


35 

they  will  be  entitled  to  demand  repayment  of  the  advance  of 
£400,000  made  to  the  Government  last  year  in  April  1913. 

In  the  seventh  place,  the  amounts  due  on  indemnities,  which 
have  been  outstanding  since  October  last  will  work  out  at  over 
£2,500,000.  The  total  to  be  paid  by  China  on  this  account 
works  out  roughly  at  £250,000  per  month.  Making  due  al- 
lowance for  last  year's  surplus  from  the  Customs  revenue  and 
the  accumulation  of  Native  Customs  revenue,  which  Dr. 
Morrison  referred  to  recently,  there  would  still  be  outstanding 
the  amounts  due  from  January  this  year. 

Lastly  seeing  that  the  Chinese  dropped  the  Anglo-Belgian 
syndicate  loan  after  taking  an  advance  of  £1,250,000,  the  syn- 
dicate will  not  have  the  least  hesitation  in  demanding  immediate 
payment  of  the  amount.  Besides  there  are  a  number  of  small 
Japanese  loans,  and  small  German  loans,  other  than  those  we 
have  mentioned,  mostly  for  arms  supplied  during  the  revolution 
— the  date  of  payment  of  which  is  long  overdue.  Everybody 
has  been  anxiously  waiting  for  the  big  loan,  especially  as  no 
security  has  been  given  besides  the  bond  of  the  Chinese  au- 
thorities. 

Further,  it  is  necessary  to  state  in  this  connection  that  the 
merchants,  banks  and  other  rich  Chinese  who  helped  the  new 
Government,  both  during  the  struggle  and  after,  now  stand 
badly  crippled  from  want  of  funds.  They  have  been  often 
told  that  their  outstandings  would  be  cleared  as  soon  as  the 
first  loan  with  the  foreigner  was  closed.  Trade  is  badly  in 
need  of  the  funds  spent  on  the  revolution;  and  if  a  moiety  of 
the  debts  of  the  Government  is  not  paid  even  after  a  foreign 
loan  becomes  an  actuality,  the  failure  may  give  rise  to  acute 
discontent.  The  amount  on  this  score  is  not  available,  but 
the  lowest  estimate  puts  it  at  about  Tls.  20,000,000. 

Let  us  suppose  that  the  London  Syndicate  is  able  to  float  the 
whole  of  the  £10,000,000*  in  October.  The  loan  is  expected 
to  be  floated  at  95,  brokerage  and  other  expenses  incident  on 
the  flotation  may  be  put  at  3  per  cent.,  and  by  the  time  the  loan 
is  floated,  if  at  all  successfully,  China  would  have  received  and 
spent  at  least  £150,000.  The  net  receipts  from  the  loan  would 
therefore  amount  to  £9,050,000.  The  total  foreign  indebted- 
ness, of  which  China  could  not  in  honor  delay  payment, 
amounts  to  £8,950,000.  Thus  she  will  have  a  residue  of 
£100,000  with  which  to  pay  her  unpaid  troops  and  disband 
them,  and  begin  setting  the  Republic  in  order. 

If  China  refuses  to  pay  all  her  outstanding  debts  at  present 
except  the  indemnity  instalments  that  have  fallen  in  arrears — 
in  order  to  save  the  Salt  Gabelle  from  being  taken  over  by  the 
Powers — she  will  have  fully  £6,500,000  to  pay  her  soldiers  with 
and  begin  reforms  at  once — so  it  is  suggested  in  some  quarters. 
In  the  case  of  an  individual  such  refusal  would  mean  bank- 

*  £5,000,000  was  floated  in  September.  The  Bankers  paid  89  for 
the  bonds — China  received  not  more  than  £4.450,000. 


36 

ruptcy;  in  the  case  of  a  nation  it  would  mean  the  utter  ruination 
of  its  credit  in  the  markets  of  the  world.  And  China  must 
necessarily  borrow  much  more  than  £10,000,000.  There  is  no 
disguising  the  fact  that  China  has  no  security  to  offer — security 
in  the  proper  sense  of  the  word.  Her  performances  in  the  past 
have  not  been  such  as  to  inspire  confidence.  And  her  hidden 
resources  need  an  enormous  amount  of  capital  in  order  that  any 
tangible  result  may  be  got  out  of  them. 

It  may  be  remembered  that  in  his  speech  in  March  before  the 
Assembly  at  Nanking  the  then  Premier,  Mr.  Tang  Shao  Yi, 
stated  that  £25,000,000,  besides  the  revenue,  would  be  ab- 
solutely needed  within  the  next  twelve  months.  What  he  said 
then  was  substantially  correct,  and  remains  true  today.  The 
interval  has  only  slightly  added  to  the  total  needs,  as  the  soldiers 
are  still  being  kept  and  paid  from  want  of  funds  to  pay  and  dis- 
band them — although  in  the  interim  a  number  of  small  loans 
and  advances  have  all  been  received  and  spent.  It  is  quite 
interesting  to  note  the  different  items  for  which  funds  are  needed 
although  our  list  is  not  identical  with  that  supplied  to  the  As- 
sembly by  Mr.  Tang  Shao  Yi. 

If  China  wishes  to  preserve  her  credit  as  a  Power,  she  must 
liquidate  her  pressing  debts  before  beginning  any  constructive 
work.  First  and  foremost  is  the  foreign  indebtedness  to  the 
tune  of  £9,000,000 — the  details  of  which  we  have  mentioned 
above.  Secondly,  her  merchants,  bankers  and  gentry,  who 
supplied  funds  to  prosecute  the  revolution  and  carry  on  the  new 
Government  deserve  better  consideration  than  they  have  re- 
ceived ;  and  the  sums  owing  to  them  are  estimated  at  about  Tls. 
20,000,000,  or  roughly  £3,000,000.  Thirdly,  she  must  pay  the 
troops,  who  are  now  eating  their  heads  off,  and  disband  the 
major  portion  of  them.  It  was  estimated  that  expenditure  on 
this  score  would  cost  £5,000,000  some  four  months  ago.  A 
certain  number  of  troops  have  been  disbanded,  but  the  cost  of 
getting  rid  of  the  rest  of  them  has  not  greatly  been  lessened, 
owing  to  the  delay. 

Fourthly,  she  will  have  to  buy  back  the  Republican  Bonds, 
on  which  she  has  to  pay  interest  half  yearly  at  the  rate 
of  8  per  cent,  per  annum,  while  the  bonds  are  contin- 
ually depreciating.  Sums  received  on  account  of  the  "  so- 
called  patriotic  loan,"  while  of  no  practical  utility  to  her, 
are  depleting  the  resources  of  the  trade  in  the  provinces.  These 
suggestions  are  made  with  the  view  to  enable  China  to  start 
with  a  clean  slate,  if  she  wishes  to  proceed  with  the  work  of 
reorganization  without  encumbrances.  Thus  before  she  begins 
any  construction  work  she  stands  to  have  to  pay  out  £19,- 
000,000. 

Now  as  regards  sum.s  needed  for  construction  work  and 
reform.  The  basis  of  all  reorganization  in  China  is  currency 
reform,  and  so  long  as  the  currency  is  what  it  is  there  is  no  hope 
of  making  headway  of  any  kind.  It  may  be  remembered  that 
in  the  currency  loan  arrangement  of  1911,  £7,000,000  was  set 


37 

apart  for  currency  reform ;  and  that  amount  does  not  err  on  the 
side  of  extravagance.  Whatsoever  may  be  the  final  decision 
in  regard  to  the  standard,  there  is  no  doubt  that  a  considerable 
amount  of  silver  would  have  to  be  purchased  presently  and 
coined;  and  one  may  rest  assured  that  in  working  out  the 
details  in  connection  with  bringing  about  a  uniform  currency 
throughout  the  length  and  breadth  of  the  country,  more  funds 
may  be  needed  later  on. 

Of  equal  importance  is  the  immediate  necessity  for  taking 
measures  to  minimize  the  effects  of  the  famines  and  floods, 
which  cause  a  perennial  loss  to  the  country  and  bring  death 
and  ruin  to  thousands,  if  not  millions,  year  after  year.  Mr. 
Jameson's  scheme  of  constructing  dykes  should  be  taken  in 
hand  immediately,  and  afforestation  should  be  carried  on 
simultaneously.  An  expenditure  of  £5,000,000  distributed 
during  the  next  five  years  is  not  beyond  the  mark;  and  the  loss 
averted  during  this  period,  judging  by  past  experience,  would 
be  fully  that  amount.  Of  course,  when  a  loan  is  arranged,  it 
should  be  for  the  full  amount,  for  the  sooner  the  works  are 
finished  the  more  profitable  they  would  be  for  the  country. 
In  so  far  as  such  expenditure  would  amply  repay  itself,  it  is 
hardly  to  be  reckoned  among  China's  debts.  But  it  is  a 
charge  for  which,  in  the  first  place,  a  large  sum  of  ready  money 
will  be  required. 

The  ideal  of  any  loan  to  China  at  present  should  be  to  enable 
her  to  pay  back  the  past  and  present  borrowings.  Of  course, 
the  basis  of  such  an  ideal  are  the  untapped  resources  of  China 
for  taxation,  the  great  industrial  and  agricultural  possibilities 
of  the  land  and  the  hidden  resources  of  the  country.  But  even 
to  find  these  money  is  needed;  to  develop  them  much  more. 
Development  in  this  dh-ection  alone,  under  the  aegis  of  a  good 
government  and  a  sound  currency,  would  enable  China  to  pay 
interest  and  principal  of  past,  present  and  future  debts.  Ex- 
pedients like  those  of  the  increase  of  the  customs  dues  or  the 
salt  tax  would  prove  only  of  temporary  utility,  and  under  cer- 
tain conditions,  might  even  do  harm. 

The  currency  loan  of  last  year  included  provision  for  £3,000,- 
000  for  Manchurian  industrial  development.  And  thrice  three 
millions  sterling  for  the  eighteen  provinces  for  industrial  develop- 
ment and  administrative  reform  would  only  err  on  the  side  of 
economy.  Of  course,  this  programme  does  not  take  into  ac- 
count sums  needed  for  railway  construction  in  the  countiy 
or  private  industrial  enterprises.  And  in  China's  present  finan- 
cial state  it  would  be  ridiculous  to  dream  of  spending  money 
for  military  or  naval  advancement.  Thus,  it  would  seem  that 
if  foreign  loans  should  serve  any  beneficent  purpose  at  all  for 
China,  a  sum  of  £40,000,000  is  necessary  during  the  year  end- 
ing, say,  next  June;  and  further  amounts,  into  the  details  of 
which  it  is  too  early  now  to  go,  appear  likely  to  be  needed  in 
the  coming  years. 

This  total  of  China's  needs  for  the  year  is  based  on  the  sup- 


38 

position  that  the  revenue  of  the  country  will  meet  its  ordinary- 
expenditure.  Mr.  Tang  said  there  would  be  a  deficit  of  Tls. 
40,000,000  this  year,  and  probably  the  same  amount  next — the 
obvious  deduction  being,  of  course,  that  borrowings  will  have 
to  be  increased  to  this  extent.  Anyhow,  there  is  no  doubting 
that  any  syndicate  proposing  to  lend  money  to  China  should 
be  able  to  arrange  for  £40,000,000  during  the  next  nine  months, 
and  be  able  to  pay  about  £60,000,000  during  the  next  three 
years.  The  original  proposal  of  the  Sextuple  Group  was 
arranged  on  this  basis,  and  the  total  of  £60,000,000  was  agreed 
upon  as  necessary  for  the  regeneration  of  the  country. 

Again  it  should  not  be  forgotten  that  the  annual  payments 
on  foreign  loans  by  China  will  almost  be  trebled  from  1916. 
The  amortization  of  the  i  ailway  loans  starts  from  then,  and  the 
indemnity  payments  would  then  be  more  than  double  the 
present  amounts.  If  China  is  not  up  and  doing,  with  something 
in  the  way  of  reorganization  she  must  be  deeper  in  the  mire 
than  ever  by  1916.  At  present  everything  in  the  way  of  re- 
form needs  large  initial  expenditure.  To  stop  squeeze  in  the 
collection  of  revenue  it  is  necessary  to  have  good  accounting, 
and  officials  with  a  salary  v/hich  would  place  them  above  temp- 
tation. The  land  tax  in  China  gives  a  ridiculously  low  yield; 
to  increase  it  an  effectual  survey  costing  millions  of  taels  is 
essential. 

That  the  banks  composing  the  Sextuple  Group,  with  their 
respective  Governments  at  their  back,  would  be  able  to  supply 
China  with  this  large  total  with  more  facility  than  any  number 
of  other  syndicates  is  beyond  question.  The  Chinese  themselves 
know  it,  and  hence  their  anxiety  to  keep  on  good  terms  with 
the  Group  in  spite  of  their  latest  action. 

Apropos  of  the  apparent  success  of  the  new  loan  we  understand 
that  already  demands  have  been  made  upon  Peking  by  several 
individuals  and  institutions  in  China.  The  funds  of  the  Bank 
of  China  were  drawn  upon  to  further  the  cause  of  the  revolu- 
tion; and  the  Bank  naturally  requires  money  to  carry  on  its 
ordinary  business.  This  bank  is  the  best  of  institutions  of  a 
similar  kind  in  China  and  deserves  the  help  of  the  Government 
— at  least  to  the  extent  of  receiving  back  what  it  paid  out. 
But  then,  how  far  will  £10,000,000  go?  " 

Such  is  the  situation  as  seen  by  the  Shanghai  business  man. 
The  Six  Groups  because  of  the  support  of  their  Governments, 
and  because  they  believe  that  a  loan  properly  safeguarded 
is  the  only  means  by  which  normal  conditions  can  be  restored 
in  China,  are  ready  to  assist  the  Chinese  Government,  in  deal- 
ing with  the  conditions  described  above.  They  are  criticized, 
however,  because  they  are  unwilling  to  loan  funds  except  on 
terms  which  the  Chinese  regard  as  humiliating. 


89 

It  has  frequently  been  stated  moreover  that  one  of  the  chief 
Chinese  objections  to  the  "  Six  Power  "  Group  has  been  the  fear 
of  any  combination  in  which  Russia  and  Japan  is  represented. 
Those  who  are  familiar  with  Far  Eastern  politics  and  who  have 
considered  their  relation  to  European  affairs,  are  aware  that  this 
grouping  of  the  Powers  is  a  safeguard  rather  than  a  menace  to 
China's  integrity.  They  will  realize  that  if  this  combination 
be  maintained  and  China  be  willing  to  co-operate  therewith, 
she  will  be  able  better  to  protect  herself  against  the  selfish 
designs  of  individuals  which  even  though  they  may  not  be 
prevented  will  certainly  be  restricted  by  the  necessities  of  joint 
action.* 

Those  who  have  criticized  the  attitude  of  the  Six  Power  Group 
have  in  a  measure  lost  sight  of  some  of  the  elementary  functions 
of  a  banking  house  which  handles  foreign  loans.  They  have  for- 
gotten that  it  is  not  the  Bankers  themselves  who  provide  the 
money  to  finance  a  foreign  loan,  though  they  may  for  a  time  ad- 
vance from  their  own  resources  certain  preliminary  payments. 
Bond  issues,  however,  are  sold  to  the  public  the  bankers  receiv- 
ing their  commission  on  the  sale  and  the  reputation  of  a  house 
of  issue  like  that  of  any  other  commercial  establishment 
depends  upon  the  quality  of  the  commodity  which  it  sells. 
Bankers  would  not  be  justified  in  requesting  their  clients  to 
take  bonds  on  a  sentimental  and  not  a  business  basis  any  more 
than  the  President  of  an  insurance  company  would  be  warranted 
in  loaning  funds  for  which  he  was  responsible  to  a  personal 
friend  regarding  whose  solvency  he  had  no  guarantee. 

The  Groups  engaged  in  the  present  Chinese  loan  negotiations 
are  institutions  of  the  highest  standing  in  their  respective 
countries.  The  rupture  in  negotiations  did  not  come  because  the 
Bankers  attempted  to  obtain  an  unreasonable  commission  but 
because  they  felt  they  could  not  afford  to  place  upon  the  market 

*Had  it  not  been  for  the  agreement  between  the  Six  Powers  to  take  no 
separate  and  individual  action  during  the  Revolution  Japan  would  have 
sent  an  expedition  to  China  to  keep  the  Manchus  on  the  Throne.  She  was 
prevented  from  taking  this  step  by  the  representations  of  the  British 
Government  which  insisted  that  nothing  should  be  done  to  prejudice  con- 
tinued joint  action  by  all  the  Great  Powers. 


40 

a  loan  which  they  did  not  consider  sound  in  the  present  state 
of  China  unless  they  obtained  safeguards  such  as  they  have  de- 
manded, not  to  add  to  their  own  profit,  but  in  the  interest  of  the 
prospective  investor. 

Fair-minded  observers  of  recent  events  in  the  Far  East 
recognize  that  the  American  Banking  Group  has  during  the 
past  three  years  demonstrated  its  friendship  for  China.  The 
American  bankers  personally  wish  for  the  success  of  the  Chinese 
Republic.  As  real  friends  of  China,  however,  it  would  be  just  as 
reprehensible  for  them  to  offer  for  sale  bonds  secured  from  China 
on  terms  which  they  did  not  consider  calculated  to  restore  and 
increase  her  credit,  as  it  would  be  for  them  to  issue  to  the 
public  securities  which  they  did  not  feel  assured  would  consti- 
tute a  sound  investment. 

It  has  been  stated  by  men  in  authority  in  Peking  that  they 
would  rather  sell  their  country  bit  by  bit  than  submit  to  the 
terms  asked  by  the  Six  Power  Group.  Concessions  have  been 
offered  giving  to  foreigners  the  right  to  construct  and  operate 
railways  for  forty  years  in  return  for  a  cash  down  payment  of 
5,000,000  Taels.  This  indeed  would  be  to  sell  the  nations 
birthright  for  a  mess  of  pottage  and  to  sow  the  dragon's 
teeth  of  financial  bondage.  Yet  it  is  proposed  by  the  very  men 
who  complain  most  bitterly  of  the  conditions  required  by  the 
Six  Groups  which  are  mild  in  comparison  and  which  are  cal- 
culated to  build  up  a  strong  Central  Government  rather  than 
create  a  nest  of  warring  foreign  interests  which  would  cause 
China  trouble  and  shame  for  years  to  come. 

In  these  negotiations  the  banking  groups  have  been  charged 
with  a  very  heavy  responsibility.  Their  terms  were  sub- 
mitted only  after  long  and  careful  deliberation.  China's 
difficulties  were  fully  and  sympathetically  considered  and  the 
conditions  required  by  the  Groups  were  prepared  in  her  in- 
terest as  well  as  in  the  interests  of  the  Groups  and  the  prospec- 
tive bondholders. 

Recognizing,  however,  the  peculiar  difficulties  of  the  present 
Peking  Government  the  Groups  have  throughout  been  willing 
to   consider  any   plan   which   the  Chinese  themselves  might 


41 

propose,  calculated  to  free  them  from  embarrassment,  and 
at  the  same  time  carrying  with  it  safeguards  sufficient  to  make 
any  loan  based  thereon  a  sound  investment. 

The  Six  Groups  have  been  endeavoring  to  induce  China  to 
undertake  real  constructive  work  while  the  Peking  authorities 
have  either  failed  to  realize  the  necessity  therefor  or  have 
been  unwilling  to  assume  the  responsibility  of  undertaking  a 
practical  and  comprehensive  scheme.  In  following  this  course 
these  officials  are  China's  worst  enemies  for  the  reckless  finan- 
cial policy  of  the  past  few  months  if  continued  will  lead  to 
that  very  intervention,  which  in  refusing  the  Six  Groups' 
terms,  these  gentlemen  have  been  avowedly  trying  to  avoid. 

The  Groups  have  not  been  attempting  to  force  money,  with 
humiliating  conditions  attached,  on  China.  They  have  stated 
merely  that  they  are  willing,  only  upon  certain  conditions,  to 
loan  the  money  which  China  has  requested  them  to  furnish. 
The  Groups  do  not  insist  that  China  borrow  if  their  con- 
ditions are  unacceptable.  They  do  say  that  they  will  not 
issue  Chinese  bonds  on  terms  which  they  regard  as  unsatis- 
factory. The  "  Six  Power "  Groups  do  not  constitute  a 
monopoly  but  they  are  not  willing  to  undertake  any  loan  unless 
assured  that  they  will  be  entitled  to  furnish  on  sound  condi- 
tions funds  to  complete  the  transactions,  the  initiation  of  which 
they  finance,  and  that  they  shall  have  a  clear  market  until 
the  different  loan  series  for  which  they  contract  are  sold. 

For  the  sake  of  the  preservation  of  China's  integrity  and 
the  commercial  "  open  door  "  it  is  to  be  hoped  that  some 
mutually  satisfactory  understanding  may  be  reached  between 
China  and  the  "  Six  Power  "  Group.  It  is  to  China's  interest 
that  this  combination  should  be  maintained,  and  it  is  to  the 
interest  of  China  as  well  as  of  the  United  States,  that  we  should 
retain  our  present  position  therein.  China's  great  problem 
to-day  is  that  of  finance.  It  is  to  her  advantage  that  we  are 
entitled  to  a  practical  voice  in  its  solution,  and  it  is  to  the 
advantage  of  American  trade  that  the  United  States  continue 
to  be  an  active  party  in  Chinese  loan  negotiations. 


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